Amara Omeokwe, Bloomberg News
It is a widely believed among economists that President Donald Trump’s tariffs will significantly boost inflation over the coming months. But the price rise so far has questioned that assumption, encouraged the White House and launched a split into the Federal Reserve.
The stiffer inflation forecasts are preventing the US Central Bank from offering reduced profit margins as they wait to see what happens this year. The Trump administration has put strong pressure on Fed Chairman Jerome Powell to cut borrowing costs, and the two Fed governors recently forked publicly from Powell in July by making the cut appropriate.
Key reports for the coming weeks – monthly employment reports scheduled for Thursday and another report on consumer prices through July 15th – are important in determining the next steps for central banks. Both are expected to eventually begin to reflect the impact of tariffs, but surprises could change the schedule of interest rate cuts.
“One of the things that have become so difficult is that we haven’t done this kind of experiment in the past,” said William English, a professor at Yale Management School and a former high-ranking Fed economist, about tariffs. “It’s extremely difficult to be confident about forecasts because we are outside the scope of the modern American economy’s experience.”
Trump and his allies have escalated attacks on the Fed and Powell in recent weeks. The president embraces some insults at Powell, calling him “Nukskull” and “one of the government’s stupidest and most destructive people.”
Other Trump administration officials and some Congressional Republicans often remain more silent on considering monetary policy — and so are taking part. “There’s absolutely no reason for the Fed not cutting interest rates right now,” Kevin Hassett, director of the White House National Economic Council, said on June 23.
Hassett is considered a possible alternative to Powell when the Fed Chairman’s term expires next year, highlighting data in the coming weeks.
And Treasury Secretary Scott Bescent told Bloomberg television on Monday that “it looks a bit frozen on the wheels here.”
The discussion reflects a sensitive situation in which there is a Fed, as it aims to avoid policy errors. Authorities may have to resort to more aggressive measures later if they cut interest rates in the same way that tariff-related price pressures begin. However, in order to combat inflation that never materializes, it can unnecessarily curb the retention rate of rising levels, causing damage to the labour market in the process.
Forecasters hope that inflation will accelerate in the coming months. Powell told Congress in testimony last week that he expects a “meaningful” price rise as data from June, July and August will work through the economy. However, he added that Fed officials are “fully open to ideas.” The effect can be less than feared. “If that’s the case, that’s important to our policy.”
The Bureau of Labor Statistics will publish a report on consumer prices for June, July 15th, two weeks before the central bank’s next policy meeting. Fed Governors Christopher Waller and Michelle Bowman are both Trump appointees, who will take a step forward with Powell and other colleagues, increasing the likelihood of fee cuts next month if data works together.
“I think we have room to beat that, and we can see what happens with inflation,” Waller said in a June 20 interview with CNBC. “We’ve been pausing for six months to wait and see, and so far the data hasn’t been a problem.”
Still, investors are currently only seeing around 20% of the chances of moving in July, and instead bet that the next cut will come in September, according to federal fund futures.
Customs Mathematics
The benign inflation measurements may suggest, at least for now, finding ways to avoid price increases despite Trump’s tariffs on many US trading partners.
One potential explanation is that it is addressing through an inventory of imports that front-loaded in the first quarter, said Josh Hirt, senior US economist at Vanguard Group.
Hirt’s calculations suggest that importers paid a lower effective tariff rate this year than Trump introduced.
Another source of Powell’s uncertainty, discussed in his testimony, is how tariff costs are divided between exporters, importers, retailers, manufacturers and consumers.
“Initially, it will be the importers who will pay the tariffs, but ultimately it will spread between five people,” Powell said, adding that the data suggests that at least some of the impact will have on consumers.
The July 15th inflation report reveals that tariffs have been depressed for employment so far this year, before the arrival of equally consequential monthly data on employment from BLS on July 3rd, there are few indications that tariffs have been depressed for employment.
But similar to inflation data, predictors are primarily maintaining that there is no potential labor market impact of dramatic changes in trade policy before the June figures are released. In a Bloomberg survey, economists said this week’s report expects unemployment rates to rise by up to 4.3% in June, the highest level since 2021.
In a speech on June 23, Bowman said in a June 23rd speech, Fed officials should recognize that, given the recent softness of vulnerability in the labor market, the downside risk to our employment delegation could soon become pronounced.
Monthly consumer spending figures issued Friday by the Bureau of Economic Analysis showed spending declines in May as households were pulled back to discretionary services such as travel and food, and forecasters warned that higher prices will put pressure on consumption in the coming months.
Yale’s English said the impact of tariffs depends on factors that are difficult to measure. But “I feel that the intuition that seems like there’s a pass-through of tariffs on prices is just right,” he said. “I haven’t yet thought the basics are wrong.”
(With the support of Sonali Basak.)
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Original issue: July 1, 2025, 12:34pm EDT
