Powell’s Revelation on Tariffs and Interest Rates

Last Friday in Jackson Hole, Federal Reserve Chairman Jay Powell expressed a sense of frustration and finally acknowledged something that many have asserted for a while: tariffs don’t actually drive inflation.

At most, tariffs lead to a temporary price adjustment rather than a continuous increase that warrants punitive interest rates. If foreign exporters bear the brunt of these costs, even those temporary adjustments could be largely disregarded.

The conclusion is pretty straightforward. If the effects of tariffs are either negligible or merely one-off price shifts, then citing “customer uncertainty” as a reason for a restrictive interest policy doesn’t hold up.

This moment seems significant for Powell, who has long misinterpreted the principles of Trump’s economic strategy. That strategy emphasizes economic growth and price stability through tax cuts, deregulation, energy independence, and fair trade practices.

The Fed’s restrictive interest rate policy is holding back the US economy.

Under Trump’s economic approach, the first half of the year showed both strong growth and stable prices. The economy is again picking up steam.

Markets quickly reacted to Powell’s comments about tariffs. The Dow surpassed 45,000, much to my surprise—I thought it would hit that mark by March. Treasury yields fell significantly, and bond prices rose as a result.

Clearly, Wall Street caught on to Powell’s new insights regarding tariffs; the prospect of interest rate cuts in September looks promising. The real question is whether Powell will opt for a conservative 25 basis point rate cut or take a more substantial leap.

However, there’s still a lingering concern: even if Powell acknowledges that tariffs don’t lead to sustained inflation, he may still not fully grasp who bears the costs.

Positive economic data might pose challenges for Trump’s interest rate strategy.

Just a reminder for Powell: our main trading partners are also those contributing to our $1 trillion annual trade deficit. They heavily depend on access to the US market. When tariffs are imposed, it’s the exporters in those countries—not American consumers—who take the hit. Without US demand, their economies are likely to falter, meaning our trading partners essentially need to absorb the tariff costs.

This concept was evident during Trump’s era, where every tariff imposed created pushback, despite all the inflation worries raised during that time.

While Powell continues to enforce restrictive rates, he may inadvertently harm the economic landscape. American families are already facing some of the highest mortgage rates in the world, small businesses struggle to find affordable credit, and exporters are grappling with an inflated dollar, making their products more expensive in the global market.

The disparities in global rates highlight how disconnected the Fed is from the rest of the world. The European Central Bank has rates around 2%, while Japan holds them near 0.5%. China’s seven-day repo rate is at 1.4%. In contrast, the Fed’s target of 4.25% to 4.50% stands out significantly higher, over 200 basis points than Europe and nearly 400 higher compared to Japan.

As Trump’s policies yield positive results, the left’s efforts to remove tariffs appear futile.

Consequently, the US economy faces a combination of the highest policy and mortgage rates globally, compounded by pressure on American exporters.

• Funding disadvantages: American manufacturers contend with higher rental and operational costs for new facilities.
• Currency distortion: The Fed’s rate hikes inflate US export prices while keeping the dollar high, disadvantaging American firms in international markets.
• Market share erosion: Foreign competitors often secure contracts—not due to innovation—but by borrowing at lower rates to underprice US firms.

Back at home, the pressure from Powell’s policies is felt acutely. The average fixed 30-year mortgage rate remains at around 6-7%, pushing many young families out of the housing market and stalling home construction—historically vital for US economic recovery.

Small businesses that rely on bank loans instead of Wall Street financing face interest rates in the double digits, hampering job creation. Consumers are feeling the pinch too, paying more for everything from credit cards to car loans.

What’s the outcome of all this? The inflation we’re experiencing is already here. The headline CPI has approached nearly 3% year-on-year, and the Fed’s preferred PCE metrics hover around 2.5% on target. Energy costs are under control, supply chains are stabilizing, and wage pressures are easing. Yet our true inflation rate, adjusted for costs, remains at a two-decade high.

Powell maintains this stringent approach, arguing the Fed must manage inflation expectations. He remains wary of what he perceives as tariff-induced inflation, despite historical evidence suggesting such fears are often overblown.

Powell’s recent acknowledgment—recognizing that tariffs might only lead to one-off price changes—could signal a pivotal moment. The question now is whether he will act on this insight.

Simply trimming rates by 25 basis points in September won’t suffice. The Fed should consider a significant reduction of up to 100 basis points to align with global standards, lessen the financial strain on families and farmers, and enhance competitiveness for US exporters.

It’s time for the Federal Reserve to cease its over-cautious monetary policies. Being ahead of the curve shouldn’t equate to isolation. Such a stance can suffocate growth in America and hand advantages to global competitors.