Tariffs or Employment... Powell's 'Rate' Dilemma

Price Stability Despite Tariff Hikes
White House Pressures for Rate Cuts
Market Awaits CPI Release on the 16th

Employment remains robust, while inflation is subdued. Jerome Powell, Chair of the US Federal Reserve (Fed), now faces a dilemma between the Fed's dual mandate of full employment and price stability. Despite tariff hikes, inflation has not risen significantly, contrary to concerns. This leaves the Fed unable to justify either maintaining current rates or cutting them immediately, given the strength of employment indicators. As the White House shifts blame for delayed rate cuts onto Chair Powell, market attention is focused on the Consumer Price Index (CPI), which could signal the direction of future rate policy.

Robert Hetzel, former Chief Economist at the Federal Reserve Bank of Richmond, told Business Insider on the 13th, "Chair Powell is facing an epic and delicate conundrum." This message describes a situation where inflation is not rising, yet pressure to cut rates is mounting, and employment remains strong?meaning there is no clear answer for policymakers.

For the Fed to align with President Donald Trump's calls for lower rates, it needs justification. One of the key criteria is the job market. Moreover, when inflation is not surging, as recently, the focus inevitably shifts to "how much employment is weakening." However, recent employment indicators have been stronger than expected.

On July 3, the US Department of Labor announced that nonfarm payrolls increased by 147,000 compared to the previous month. This figure far exceeded the Dow Jones expert forecast of 110,000. The unemployment rate also fell from 4.2% in May to 4.1% in June. Although President Trump continues to press Chair Powell for a rate cut by repeatedly saying "Too Late," Powell maintains a cautious stance, insisting that the situation must be closely monitored.

Despite President Trump's urging, Chair Powell reiterated, "We make decisions based on inflation and employment indicators," confirming that the Fed will not rush policy responses until uncertainty surrounding tariff policy is resolved. This suggests that, rather than lowering rates to reduce the burden of a rapidly increasing fiscal deficit, the Fed will make decisions faithful to its dual mandate of price stability and full employment, based on data.

Another reason Chair Powell is hesitant to cut rates is tariffs. Most companies accelerated imports to secure inventory before President Trump's tariff announcement, which has helped keep prices stable so far. The Financial Times (FT) explained, "US companies secured import volumes ahead of the tariffs, so even after the tariffs took effect, there was no inflation shock."

Ironically, this price stability has become grounds for attacks from the White House. Politico reported, "Strong employment is now being used as a justification for political attacks."

However, if the Fed cuts rates prematurely, reassured by strong employment data, and tariff-driven inflation materializes with a time lag, the Fed would be forced to tighten policy again. Such a rapid reversal in rates could lead to an economic slowdown and shocks to the labor market, ultimately undermining the consistency and credibility of policy. At the Federal Open Market Committee (FOMC) meeting held in June, most Fed members judged that tariffs pose a persistent inflation risk and therefore considered it prudent to delay the timing of rate cuts.

With no clear direction on rates being presented, the market is closely watching the CPI, scheduled for release on the 16th. As Chair Powell has emphasized a "data-driven approach to rate decisions," the upcoming CPI result is likely to be a crucial turning point for future policy. If inflation rises more than expected, the Fed's rate cut could be postponed even further.

This content was produced with the assistance of AI translation services.