Federal Reserve Chair Jerome Powell opened the door to a September rate cut on Friday, saying in a speech in Jackson Hole that “the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.”
In a speech that touched both on the economic outlook and the Fed’s new policy framework, Powell took pains to note that risks from inflation remain “tilted to the upside,” saying that tariff-related inflation pressures “are now clearly visible.”
My take is that there are two ways to read this and neither is positive.
Powell is knuckling under to presidential pressure.
A declining economy is a greater danger to the economy than rising inflation.
The markets fail. The economies fail. There is mass unemployment. There is global deflation. This is only a poor attempt to stop all the problems to come.
The tariff inflation, while not insignificant, will be transitory.
“We expect those effects to accumulate over [the] coming months,” Powell said, “with high uncertainty about timing and amounts. The question that matters for monetary policy is whether these price increases are likely to materially raise the risk of an ongoing inflation problem.”
Powell added on inflation that the Fed “will not allow a one-time increase in the price level to become an ongoing inflation problem.”
Post-war history has leaned toward the temporary/transitory. For example, a paper last month by Schmitt-Grohe and Uribe:
Abstract:
We estimate transitory and permanent import tariff shocks in the United States over the postwar period.
We find that transitory tariff increases are neither inflationary nor contractionary, and are not associated with monetary tightening. In contrast, permanent tariff increases trigger a temporary rise in inflation (a one-off increase in the price level) and a brief tightening of monetary policy.
Consistent with the intertemporal approach to the balance of payments, transitory tariff increases reduce imports and improve the trade balance, whereas permanent increases leave both largely unchanged. Transitory shocks account for approximately 80 percent of tariff movements. Overall, tariff shocks are estimated to be a minor driver of U.S. business cycle fluctuations on average and even during episodes of substantial tariff hikes, such as Nixon 1971, Ford 1975, and Trump 2018.
There was one period that some of us may remember that wasn’t very “temporary”, if, that is you define temporary as not more than a couple years: 1973-1981.
Only one year during that period was less than 6% and the average of that period was about 10% (per year).
Abstract
We quantify the macroeconomic effects of the tariff measures announced (but not entirely implemented yet) on Liberation Day (April 2nd, 2025) through the lens of a New-Keynesian two-country model calibrated to the US and the rest of the world. We study both a unilateral 10pp tariff increase and a global trade war scenario with retalia- tory tariffs of a similar magnitude. In either case, tariffs are always sharply contractionary for US GDP, increasing inflation and widening the trade deficit. Measured in welfare terms a unilateral tariff generates gains for the US due to a large terms of trade appreciation, but these US welfare gains vanish with global retaliation. Three features of the model are critical in the evaluation of the tariff impact - the asymmetry in size and openness between the US and the rest of the world, the endogenous response of monetary policy to the inflationary effects of tariffs, and the importance of trade in intermediate goods for the scale of the global response to a tariff shock.