Jerome Powell: Grand Speculator
The Fed chair previously cautioned against using speculative forecasts to shape policies. Now, it seems he’s doing the opposite.
Jerome Powell, Federal Reserve Chairman, made a rather surprising statement recently. He suggested that if the Fed were to stick with hard data, it would actually lower interest rates. But, that’s not happening. The reason? The Fed hopes that tariffs from President Trump will somehow boost inflation, leading them to act based on that speculation.
Powell told lawmakers, “If we focus on the fundamental data and bypass the forecasts, we’d decide to keep cutting rates.” Yet he acknowledges that many forecasters are counting on a significant rise in inflation stemming from tariffs, which can’t simply be dismissed.
This marks a striking shift from the Fed’s usual data-driven approach. It also shows how central banks can sometimes let speculative models overshadow clear economic signals that suggest it might be time for more flexible policies.
I say the data goes
According to Powell, current data actually supports resuming interest rate cuts. Inflation has noticeably decreased. While there are no readings yet from the May Personal Consumption Expenditures Index, economist Jason Furman from Harvard estimates around 0.6% for the three-month annual inflation rate and 1.4% annually. Year-over-year, inflation stands at about 2%, aligning well with the Fed’s target, while core inflation is at 2.5%.
However, Powell is stalling further cuts, seemingly ignoring the current inflation trends. He and his colleagues are concerned that Trump’s “liberation day” tariff announcement on April 2nd might end up increasing consumer prices. History backs this up—from the infamous Smoot-Hawley tariffs to Trump’s initial term: Tariffs generally do not equate to inflation. In fact, they could hinder growth, as economic theory suggests can happen when tariffs are coupled with tax cuts.
The next Federal Reserve meeting is scheduled for late July. By then, there will be fresh inflation data, including the May PCE inflation and the June CPI and PPI. If Powell hasn’t acted by analyzing the past few months’ data—especially the inflation reports—it’s hard to believe he will do so in the following month. Another wait is likely.
Predictive dependencies, not data dependencies
This change in approach is noteworthy, considering Powell previously warned against this exact mentality.
In a 2018 speech at Jackson Hole, Powell emphasized that the Fed should remain cautious about responding to speculative predictions.
“Common sense suggests that we should be very cautious about relying too heavily on predictions of rare events. The models used to create such predictions are necessarily based on limited historical data and are subject to significant uncertainty.”
Yet, that’s precisely what Powell is doing now. There’s no modern example of the kind of inflation he fears from tariffs. He even admitted that “the impact on inflation could be short-lived.” But instead of waiting to see the effects, he’s allowing predictive models to shape policy decisions, sidelining the real-time data in front of him.
A familiar mistake: then inflation now
In some ways, Powell’s choice to prioritize tariff-driven inflation forecasts over current data mirrors past mistakes made by the Fed. In 2021, the Fed insisted inflation was “temporary.” This was despite prices rising consistently. They seemed more influenced by predictive models rather than what the actual data indicated. Consequently, they had to scramble to raise rates in 2022 and 2023 to restore credibility.
This time, instead of turning a blind eye to inflation, the Fed is overlooking disinflation. Powell acknowledges that inflation is dropping and that conditions would justify cuts, but he’s hesitating. The model suggests Trump’s tariffs could reverse this trend. Once again, the Fed is placing trust in forecasts over facts, putting itself at risk of acting too late.
Real risk: Feds that don’t trust the economy
Ironically, Powell claims the economy can handle higher interest rates. Yet, his actions suggest the Fed may not have confidence in its own framework. The core objective of the Fed, which is achieving price stability and full employment, seems to have morphed into a preemptive strategy against inflation that tariffs may or may not cause.
There’s a clear risk in waiting to confirm that conditions haven’t worsened, as the Fed could let the situation deteriorate. Housing and other credit-sensitive sectors are showing signs of weakness. Homeowners, stuck with high mortgage rates, are also feeling the pinch. The longer the Fed delays action, the more strain it may face.
It’s undeniable that monetary policy needs to consider future trends. However, there’s a distinction between making predictions based on ongoing trends and hesitating to act until the signals become overwhelmingly dire.
It’s also hard not to view this as evidence of a rejection of Trump’s trade policy. Powell insists the Fed isn’t swayed by trade issues, but the inconsistencies indicate otherwise. While they comfortably anticipated effects from temporary policies—like major spending initiatives or progressive agendas—they now seem convinced that disliked policies won’t have negative repercussions.
Powell didn’t just suggest the Fed might consider cuts later on; he indicated cuts should already be in play. If there aren’t predictions supporting current actions, it feels more like indecision than a warning.
This contrasts sharply with Powell’s standpoint in 2018. He urged central bankers to remain humble amid uncertainty and, above all, to be guided by actual economic performance.
Now, models seem to take precedence over data at the Fed—though not in the way one might expect.
