00:00 Speaker A
The market seems to be of the mindset that the Fed is on hold for a little bit longer, probably not going to cut rates again in May. Uh, Jerome Powell though, to the surprise of, I think a lot of many market observers, brought back the transitory word when describing inflation at the, uh, last press conference. Do you feel that some of these pressures that we might see from tariffs are, in fact, inflationary, that the Fed could be pausing, but leaning more to the dovish side of wanting to cut again or are you worried that, you know, prices are going to remain stubbornly higher for longer?
01:48 Speaker B
Yeah. I mean even before the tariffs, you know, there were signs that inflation was remaining a little more stubborn than the committee would like, which is why they paused in January. So if you couple that with now this potentially, you know, inflationary shock from the tariffs, I think there’s upside risks in the inflation forecast. Now, of course, they’d like to be able to look through the one-off tariff impact on prices. I mean, typically what you do, the textbook would say, you have tariffs, prices move up, and then inflation moves up temporarily, and as those prices work through to when, you know, there’s a new level of prices, and inflation comes back down. I don’t think they should put all their money on that bet. I think they should be very carefully looking, and I think the chair said this at inflation expectations because if they become unanchored, then you have the worst case scenario where you have weak growth and you have inflation moving up or at least not coming down. So I think they are going to be, you know, being on hold if you will, but that’s really about balancing the risks, right? They’re trying to balance the risk of inflation pressures moving up at the same time, the economy weakening. And so being on hold at where the rate is now until they’re convinced that inflation expectations are well anchored and then being ready to address, uh, a potential deterioration in the labor market seems like a good strategy. The danger with the strategy has to do with how that’s communicated because it could end up being communicated as, see, the Fed was late again, they remained on hold too long and therefore now they are cutting, but they should have cut it, cut earlier. But no, it’s really a strategy to balance those risks, to make sure that inflation doesn’t get out of hand. And I’m hoping that they begin to communicate more about the objective function and their reaction, their objectives and reaction function so that people will understand why they’re following a wait and see. It’s not because, you know, they’re, they’re asleep, it’s just they’re really trying to balance what’s going on between the real side of the economy, employment, which is part of their mandate and inflation, which is a very important part of their mandate as well.
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