FED: Kashkari Prefers Not Looking Through Tariff-Induced Inflation
Minneapolis Fed’s Kashkari (’26 voter) reiterated the need for caution amid uncertainty caused by US government policies, having just yesterday told BBG TV that major shifts in US trade and immigration policy means he’s not sure if the picture will be clear enough to move rates by September. Today’s speech focuses more on his broader logic including the ability or lack thereof to look through tariff-driven inflation.
- “At the Federal Reserve there is a healthy debate among policymakers about whether to “look through” the inflationary effects of the new tariffs. The look-through arguments view tariffs as creating a one-time change in the price level—a transitory inflation shock. This view prioritizes support for economic activity by lowering the policy rate while the economy transitions to its new equilibrium, at which point inflation will have returned to a 2 percent rate, albeit at a higher overall price level.”
- “Arguments against looking through tariff-induced inflation focus on the fact that the trade negotiations are unlikely to be resolved quickly. It may take months or years for negotiations to fully conclude, and there could be tit-for-tat tariff increases as trading partners respond to one other. In addition, some tariffs apply to intermediate goods, and it will take time for the full effects of those price increases to pass through to final prices. In the U.S., inflation has also been running well in excess of our 2 percent target for four years. How many years of elevated inflation can occur before long-run inflation expectations lose their anchor?”
- “These arguments support a stance of maintaining the policy rate, which is likely only modestly restrictive now, until there is more clarity on the path for tariffs and their impact on prices and economic activity. Personally, I find these arguments more compelling given the paramount importance I place on defending long-run inflation expectations.”
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US TSYS: Extraordinary Measures And Cash Look Sufficient To Head Off X-Date
Treasury has about $164B in "extraordinary measures" available as of April 23 to avoid hitting the debt limit, per its regular report out Friday. That's out of a maximum total of $375B (they have used $211B).
- With Treasury cash looking healthy (around $600B), that's a fair amount of dry powder to get through the summer months to wait out the debt limit impasse. Tax receipts have looked strong with tariff revenues also starting to boost cash flows, further reducing the near-term urgency to adjust bond issuance.
- This has also helped push back analyst “x-date” expectations to later in the summer/September. We expect to hear from Treasury about its own x-date assumptions next week.
US TSYS: Treasury Market Trading Stayed Orderly In April: Fed Report
Liquidity across financial markets including the Treasury market deteriorated after President Trump's April 2 reciprocal tariffs announcement but market functioning was generally orderly, according to the Federal Reserve's semiannual report on financial stability, released Friday. (PDF link is here)
- Treasury market liquidity has been poor for years and yields were particularly volatile in early April, contributing to a deterioration in market liquidity, the Fed said.
- Nevertheless "trading remained orderly, and markets continued to function without serious disruption," according to the report, which looked at information available as of April 11.
FED: Ex-Gov Warsh: Fed Has Failed To Satisfy Price Stability Remit
From our Washington Policy Team - Some fairly sharp words today from ex-Fed Governor Warsh on the central bank (who for what it's worth is seen by betting markets as by far the frontrunner for the next Fed Chair):
- The best way for the Federal Reserve to safeguard its independence is for policymakers to avoid expanding the institution's role over time, including wading into policy areas that are outside its core mission, former Fed Governor Kevin Warsh, a leading contender to replace Jerome Powell as chair next year, said Friday.
- "I strongly believe in the operational independence of monetary policy as a wise political economy decision. And I believe that Fed independence is chiefly up to the Fed," Warsh said in a speech at a Group of Thirty event on the sidelines of the IMF meetings. "Institutional drift has coincided with the Fed’s failure to satisfy an essential part of its statutory remit, price stability. It has also contributed to an explosion of federal spending." His speech made no mention of Trump's tariffs or the appropriate monetary policy to deal with them.
- He said the ideas of data dependence and forward guidance widely adopted by Fed officials are not especially useful and might even be counterproductive.
"We should care little about two numbers to the right of the decimal point in the latest government release. Breathlessly awaiting trailing data from stale national accounts -- subject to significant, subsequent revision -- is evidence of false precision and analytic complacency," he said.
"Near-term forecasting is another distracting Fed preoccupation. Economists are not immune to the frailties of human nature. Once policymakers reveal their economic forecast, they can become prisoners of their own words. Fed leaders would be well-served to skip opportunities to share their latest musings."
