MNI INTERVIEW: Powell To Defend Fed's Inflation Mandate -Tracy

Federal Reserve Chair Jerome Powell is likely to rule out lowering interest rates for at least several months to prevent inflation from reaccelerating and even consider rate hikes after President Trump unveiled sweeping tariffs on America's biggest trading partners Wednesday, former senior Fed economist Joseph Tracy told MNI. 

"For Powell's legacy, I don’t think there’s a dual mandate. That is the singular issue for him: bringing inflation back down to 2%," Tracy, former senior adviser to the president of the Dallas Fed and senior economist at the New York, said in an interview. "Before the tariffs happened, the objective was to do a soft landing. Now that is changing. It will be just be to bring inflation down." 

"I would not be expecting any rate reductions over the next several meetings, and whether they have to raise rates – that depends on these inflation pressures and how the data develop on that front." 

The Fed chair will seek consensus from the FOMC before communicating that message to markets, and his doing so would both help anchor inflation expectations and provide an incentive perhaps for the GOP to pass its promised tax cuts and regulatory reforms, Tracy added. (See: MNI INTERVIEW: Tariff Benefits Loom Despite Some Fallout-Miran)

"The Fed will likely decide to try to lock in the gains it already made on inflation and let the administration be accountable for the growth slowdown," he said. (See: MNI POLICY: Fed Forced Into Hawkish Stance Despite Growth Risk)

SUPPLY SHOCK

Before debating rate hikes, the Fed will want to see how foreign economies respond to the tariffs, as well as hear from its extensive network of business contacts how higher costs will feed through to customer prices, said Tracy, a nonresident senior fellow at the American Enterprise Institute and distinguished fellow at Purdue University Daniels School of Business. 

"This is the type of situation where this type of qualitative data are most helpful," he said. "The hard data will be too lagged."

A tit-for-tat escalation on trade would be a worst case scenario and likely lead to a recession as companies retrench and lay off workers. 

"If the high inflation after Covid never happened and we faced the same adverse supply shock, there would be much more reason to think the Fed would ease policy and support the growth side," Tracy said. "With the recent history, they’re backed into a corner. They have to defend the price stability side of the mandate." 

BEST CASE

A best case scenario in which all sides de-escalate, then the Fed will be back to feeling its way to the short-term neutral rate, Tracy said. 

Even before Trump's tariffs on auto imports and Canada and Mexico, price pressures were building, Tracy said. The Dallas Fed trimmed mean inflation rate had been rising on a six-month basis to 2.7% in February from 2.3% in September. 

With already a wide range of views on the neutral rate, trade policy changes, regulatory reform, the downsizing of the federal government could all have implications, he said. Estimates of the longer run federal funds rate among FOMC members ranged from 2.5% to 3.9% in March. 

"It's another reason to be cautious in rate reductions following inflation down," he said.