Lo and Behold! The Shockwave in the Economic Jungle
Despite Trump's requests for rate cuts due to tariff concerns, inflation remains unfazed, and the Federal Reserve seems unmoved. Here's the reasoning behind their stance.
Tariffs, tariffs, everywhere, but inflation ain't nowhere! That's right, folks. Since 2022, the U.S. economy has been a wild ride, but one puzzle that keeps the Fed scratching its head is that Trump's tariffs, despite being sky-high since April, haven't ignited the inflation fire like everyone thought they would.
Those taxes on foreign-made and imported goods are lickety-split the highest they've been since, well, basically forever. Trump and his pals introduced universal levies, huge industry-based tariffs, and even got into an (ironically hot) spat with China over it. But guess what? Prices for the items at the trade war frontlines, they just haven't budged much. Inflation is doing its funny dance, staying below economists' wildest estimates for the last two months.
Now, the Fed is in a pickle. They've hit the pause button on those rate cuts they were so eager for, 'cause they're scared that slashing rates might make any tariff-induced price surge even more painful. But those price increases could still be lurking 'round the corner. Companies went all-in building up supplies back in the spring, you see. That extra stockpile won't last forever, and once it's gone, the Fed might have to keep those rates sky-high to keep inflation in check.
But keeping rates high ain't all sunshine and rainbows, either. Economic data from the past couple months is starting to show some cracks in the once-formidable U.S. job market. The Fed's rate-setting crew, known as the FOMC, is gonna be mighty hard-pressed to feel confident about restarting those rate cuts when they make their official announcement on June 18. That means if you're looking to finance big-ticket buys – whether it's a new set of wheels for your chariot or a home remodel to make it look like a Roman palace – you'll have to grin and bear those near-decade-high interest rates.
If you're thinking, "Hold up, Boss Hogg, this can't be the end of the story!" Well, buckle up, partner. There's more to this tale than meets the eye. Politics has reared its ugly head, and the Fed may have to navigate some landmines left behind by our Dear Leader and his cotton-picking cronies. Trump's been renewing his attacks on the U.S. central bank, going so far as to say he might have to get physical with Chair Jerome Powell. After a surprisingly tame consumer price index (CPI) report, Vice President J.D. Vance even joined the chorus demanding rate cuts, calling it "monetary malpractice."
In a little over a month, Trump's gonna announce his replacement for Powell. So brace yourself for a wild ride as we watch this drama unfold: will tariffs push up inflation? Will the Fed cave to political pressure? And when in the Sam Hill will those rate cuts finally come? Stay tuned, folks, for more on the shockwave rippling through the American economy.
The Fed's Dilemma: Will Tariffs Push Up Inflation, or Is It All Smoke and Mirrors?
So here's the question on everyone's lips: Have tariffs pushed up inflation, or are they just making us jump at our own shadows? Well, the Fed is deep in thought, working to sort out this conundrum. Economists have been hearing for months that companies are gonna start charging more for their products because of the tariffs, but so far, the inflation reports have been softer than a fluffy marshmallow.
"We've had two exceptional inflation reports lately," said Chicago Fed President Austan Goolsbee during a public appearance in early June. "But when we talk to people, they say, 'Just you wait.'"
Some companies have already started passing those higher costs along to consumers, according to separate business surveys from the New York Fed and Cleveland Fed. But others say that price hikes might not return until the fall. Even if companies pass along just half of those higher tariff costs, retail prices could rise by nearly a full percentage point.
Major appliances went up a whopping 4.3% last month, marking the sharpest gain since August 2020. But there was little evidence of tariff-induced price hikes in other commonly imported goods. Goods prices were flat when excluding volatile food and energy categories, and both apparel prices and used and new vehicle prices fell.
"It's difficult for the Fed to predict how much inflation will go up," says Derek Tang, economist and CEO at LHMeyer. "But because there's this risk it will go up, the Fed needs to make sure it doesn't cut too soon. Their bias is to wait a little bit longer."
What If Tariffs Don't Push Up Inflation? The Specter of Consumer Exhaustion
But there's another, even more harrowing possibility: Maybe consumers are tapped out. In early May, Richmond Fed President Tom Barkin said that retailers are telling him that customers are done spending. With the tariffs eating away at their wallets, they can't handle any more price hikes.
"It's nice to say you're going to pass it on, but it's not as easy to pass it on as you might think," Barkin said.
Former St. Louis Fed President Jim Bullard said during a recent interview with Bankrate that officials should be more concerned about tariffs causing a recession, not inflation. "You can't just go into a market and say, 'All of a sudden, I'm just going to charge more for my product' and not expect your demand to fall off," he said.
When Will the Fed Cut Borrowing Costs? More Questions Than Answers
As the Fed debates the potential impact of tariffs on inflation, the economy is showing some troubling signs. Although the U.S. is still adding jobs, they're not coming from a broad base and are concentrated in only a few sectors: health care and leisure and hospitality. The unemployment rate is near record lows, but it's because people are dropping out of the labor force.
Americans are staying unemployed for longer. Applications for unemployment benefits are up, and the share of Americans filing continuing claims is the highest since 2018. Fewer workers are voluntarily quitting their jobs, which is a reflection of their attitudes about the strength of the job market. Meanwhile, the rate at which workers are getting hired is the lowest since 2014.
The Thick of It: When Could the Fed Cut Borrowing Costs? Maybe Not Until July or September, These Experts Say
But even the most dovish Fed hawk, Christopher Waller, doesn't think the Fed will cut rates until "later this year." If you want to decipher when those cuts might happen, keep an eye on the Fed's updated projections on labor market, inflation, and interest rates, which they'll release alongside the June rate decision.
Markets expect the Fed will cut borrowing costs twice in 2025, beginning in September and again in December. But Derek Tilley, chief economist at Wilmington Trust, isn't expecting any rate cuts until 2026.
If inflation does take a bite out of the economy, it's gonna be a rough ride for consumers. So what can you do to protect yourself in the meantime? Here are three tips:
- Pay Down Debt: Credit cards can be a money pit with the average one charging an annual percentage rate of 20%. With the Fed keeping rates high, it might be a good idea to wipe out your credit card debt before interest charges skyrocket. The best balance-transfer cards offer up to 21 months of a 0% intro APR.
- Review Your Budget: Take a close look at your monthly expenses and figure out what you can cut or eliminate if cash becomes tight. Americans have a greater chance of losing their jobs in a recession, so having a lean budget could help you stay afloat if times get tough.
- Find the Right Place for Your Cash: Stuffing your savings in a low-yield account at a traditional bank might not be the best move when inflation is eating away at your purchasing power. High-yield savings accounts offering annual percentage yields of 4% or more could provide a better return and help your money grow over time.
- Even though tariffs have been at record highs since April, inflation remains lower than economists' projections, causing a dilemma for the Federal Reserve as they consider the impact of tariffs on inflation along with political pressures, particularly the potential change of Chair Jerome Powell.
- The Fed's concerns are not solely focused on tariffs pushing up inflation; they are also concerned about the risk of consumer exhaustion caused by ongoing higher costs, which might lead to a decrease in demand and eventually a recession.
