Trump is likely to name the replacing for the retiring Board member any day now
|Minneapolis Pres Kashkari said the slowing economy may justify a rate cut. He calls for two before year-end. He admits we don’t know the inflationary effect of tariffs, so if the data comes in bad, maybe not. His name is now added to San Francisco Daly’s with the same perspective. Regional Fed chiefs don’t vote but have influence.
And Trump is likely to name the replacing for the retiring Board member any day now. He won’t do it at the same time, but Trump may also name his Powell replacement. The list is down to three: Warsh (former Fed gov), Waller (current Fed gov) and Hassett (director of Nat’l Econ Council).
The jobs vs. inflation debate is murky, to say the least. The big problem is the absence of a credible forecast for inflation once tariffs have hit, say year-end. It’s not just the absence of consensus. It’s the absence of any number at all.
The Fed regionals don’t see a lot of inflation, The Cleveland Fed, for example (as of Aug 6), expects CPI at 2.86% (from 2.7% in June). Its expected PCE is 2.74% and core, 2.92%. We don’t find a forward-looking forecast from Trading Economics, either.The Atlanta Fed’s “underlying inflation dashboard” has a series of growth rates from the regional Feds and features a chart comparing them to the 60-month moving average of the actual plus the 2% target. But the tariffs will be a Shock to inflation. A 60-month average is of no use. The question becomes “why can’t economists forecast outside the box?” The answer is easy—they are trying to be “scientific” and use known data and known relationships. But they need something else.
It’s interesting that the Petersen forecast has not been undated since April. The Yale Budget Lab is less shy and estimates an overall average effective tariff rate of 18.3%, the highest since 1934. The cost to the average household will be $2,400 in 2025. Hardest hit will be clothes and shoes, each about 38-40% more expensive near-term. Food and cars will also cost more. These numbers change with every release but the message is roughly the same.
Alas, a Yale estimate of inflation comparable to CPI or PCE can’t be found. If it’s there, it’s hidden. One statement is that tariffs will raise prices 2% in the short tun and 1.7% in the long run. But from what base?
What a bunch of lily-livered economists. Some outfits were braver in July—EY (the old Ernst&Young) has 3.2%. RBC has “over 3%.” The Reuters survey also has an average of 3.2%. An outdated Bloomberg is 2.7%, which we have already hit.
The point of this exercise is that while no one knows for sure by how much inflation is going up by year-end, going up it will be. Therefore, the right number to be forecasting is unemployment, since the conflict about rates rests on which measure takes priority. The market feels today that fear of unemployment will rule. Experienced economists are not so sure.
Today Krugman has a priceless headline—"Tariffs are bad. A deluded president is worse.” Krugman is referring to the $600 billion he thinks the EU has promised to do with as he chooses like a personal slush fund. Well, no. The EU doesn’t have that capability and is not what they think they agreed to. If they fail to deliver, the tariff goes back to 35%. Okay, some harm to the EU economy, but not fatal.
Bloomberg points out numerous exceptions and additional conditions, like Trump perhaps adding a Russian oil premium to China, as with India. It offers a “tariff tracker.” We say it’s not needed. Most of this is going away in 3½ years anyway, and all of it is subject to impulsive change on a thrice-daily basis. Counties are scrambling to get exemptions and some will succeed. Others will annoy Trump and get new punishments. The whole thing is a shambolic disgrace that will ruin the US’ reputation for years. From the financial markets point of view, the upshot is the still prevailing uncertainty and inability to plan.
Forecast
As we expected, the FX market is dithering, with frequent pullbacks visible only on the hourly chart but then buy-the-dip proceeding as normal. One of the big issues is how to keep the dollar on the backfoot while the 10-year yield is so clearly aiming for 4.5% or more. But for unknown reasons, the yields are barely budging on what seems like important news. Where are the vigilantes? But continuing to weigh heavily on the dollar is the uncertainty about what nonsense Trump will do next. Bond buyers are stuck with the US, but that doesn’t mean they see the US as the safe-haven of yore. We expect the dollar slide to resume, just not in a straight line.
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