The Fed’s Focus on Tariffs is Concerning
Some members of the Federal Reserve, particularly those with hawkish views, might be looking to benefit from what could be risky decisions based on incomplete information. They suggest that rising commodity prices due to tariffs are looming, and express anxiety that any further rate cuts could stoke inflation again. However, they seem to overlook notable weaknesses in consumer demand, which calls their entire stance into question.
These hawks are anxious that businesses currently absorbing the costs of tariffs will eventually pass these along to consumers in 2026, potentially leading to ongoing inflation. Even though the overall inflation rate was less severe than anticipated in September, they point to recent data showing consumer price inflation—excluding energy and food—fell short of expectations. Specifically, it surged to 3.6% annualized over three months, a jump from 2.4% in the prior three months, according to the September Wall Street Journal.
However, honing in on that specific data point raises issues. It reflects a tendency to seek data that confirms existing beliefs rather than offering a comprehensive analysis. While annualizing the latest three months of data can aid in spotting trends, it can be misleading if not considered in a broader context. Commodity prices did rise at an annual rate of 2.8% for the three months leading to September, which, if looked at alone, might seem alarming. Yet, the year-on-year increase was only 1.5%, indicating that this recent uptick might just represent a return to average growth.
Inconsistent Consumer Spending and Job Market Concerns
The snapshot of consumer spending doesn’t paint a rosy picture for hawkish perspectives either. Without official retail sales figures—unavailable due to the government shutdown—we can look instead at data from Bank of America regarding credit and debit card spending. This indicates that spending among low-income households has only risen by 0.7% year-over-year, compared to a 2.7% increase for high-income households. Furthermore, debit card usage is climbing faster than credit spending, implying that households are becoming more financially cautious. A survey shows that 62% of families feel financial pressure, with 87% intending to shop at discount stores, which doesn’t suggest that businesses can safely increase prices, tariffs notwithstanding.
A similar narrative unfolds in the job market. Monthly payroll growth has fallen dramatically, going from 168,000 in 2024 to just 29,000 by August this year. Some of this decline likely stems from reduced immigration and a hiring slowdown driven by a dwindling labor supply. Yet there are valid concerns over labor demand as well. For instance, employment in construction is expected to deteriorate further, with a downturn in commercial real estate leading home builders to scale back projects and cut labor costs due to a surplus of unsold homes. A recent Harris Poll conducted for Bloomberg News indicates that 55% of working Americans are anxious about job security, with 48% believing it would take about four months to find another job at a similar level.
“Developments resembling a recession across various sectors heighten the risk of upcoming layoffs. With hiring rates so low, even a slight uptick in layoffs could lead to significant increases in unemployment. Just because the current situation seems to be gradually cooling doesn’t mean we won’t see rapid changes in labor market conditions soon. The risks on the downside remain substantial,” noted Neil Dutta in a recent client communication from Renaissance Macro.
The argument made by hawks largely hinges on a steadfast conviction that the subtle price hikes stemming from tariffs will increase and become widespread as companies ultimately pass these costs on to consumers. However, this outcome appears unlikely due to weak demand and rising job insecurity. Businesses simply cannot maintain higher prices when consumers are cutting back, turning to discount retailers, and feeling uncertain about their employment prospects.
