Author: YANG Dapan
The uncertainty brought by US President TRON's tariff policy is making the Federal Reserve, which is "data-dependent", unable to send clear signals about the direction of the economy.
As the data released last week showed that inflation slowed more than expected in February, the Federal Reserve is preparing to announce its latest interest rate decision this Thursday. However, policymakers are also weighing concerns about the inflation or economic slowdown that may be triggered by the trade tariffs promised by the TRON administration. RSM US Chief Economist JOE Brusuelas said: "The actual commitment to future tariffs is actually undermining the Federal Reserve's data-dependent approach, meaning they will have to rely more on the forecasting framework."
Although the market generally expects the Federal Reserve to keep interest rates unchanged this week, investors will closely scrutinize the officials' economic forecasts and POWELL's post-meeting statement.
In recent years, the Federal Reserve has consistently claimed to be "data-dependent", focusing more on the latest inflation and growth data rather than modeling the future. As the Federal Reserve seeks to maintain its credibility after failing to predict the surge in inflation in 2021 and 2022, this stance has become increasingly prominent. Policymakers say that relying on data helps them maintain flexibility.
However, some economists are concerned that in an environment of heightened political and economic uncertainty, relying on retrospective data will put the Federal Reserve in a passive position, especially as the price pressures expected from tariffs may take some time to be reflected in the data.
BNY Investments Chief Economist VINCENT Reinhart said that the unexpectedly mild inflation data in February will make POWELL's rhetoric "more embarrassing", because it is "more difficult to fully rely on data" to justify keeping interest rates unchanged, and he may even revise up his forecasts for the future on Wednesday.
He added that the latest inflation report is a "rear-view mirror reading" that reflects the impact of TRON's proposed trade tariffs too early. The tariffs imposed on foreign countries have only been in effect for part of the month, and may not have been passed on to consumer prices yet.
Brusuelas said the Federal Reserve is facing a "difficult policy stance" because imposing tariffs on some of the country's largest trading partners could simultaneously increase price pressures and weaken the US job market, and the Federal Reserve's strategies for dealing with the two are completely opposite.
THOMAS Ryan, North American Economist at Caixin Macro, said that TRON's constantly changing economic policies may also affect how policymakers weigh different economic indicators. He expects the Federal Reserve to reduce its focus on price levels, as this is a "retrospective" measure of inflation, and instead increase its focus on consumer inflation expectations, which have started to rise since the beginning of this year.
Federal Reserve officials will also weigh a disappointing non-farm employment report, which showed the economy added 151,000 new jobs in February, lower than expected, exacerbating concerns about slowing growth. POWELL had downplayed these concerns in a previous speech, insisting that the economy is "in good shape" despite "high levels of uncertainty".
But JAMES Knightley, Chief International Economist at ING, said this uncertainty, with the economy and trade policy zigzagging, will mean the Federal Reserve will be "in a passive position" and "unable to plan or take a firm stance".
The dizzying policy changes of the TRON administration have already triggered a sell-off in the stock market and raised concerns among businesses. Major US airlines American, Delta and Southwest warned this week that demand is slowing due to consumer uncertainty about the US economic outlook. Meanwhile, the benchmark S&P 500 index on Wall Street fell into correction territory last week before rebounding slightly.
DAVID Wilcox, a former Federal Reserve staffer now at the Peterson Institute for International Economics, said, "We know for certain that everyone - businesses, households and monetary policymakers - hates uncertainty."
However, Wilcox said that apart from "obliquely mentioning" the challenges posed by uncertainty, Federal Reserve officials will try to avoid making any specific references to TRON's economic agenda. He said, "I suspect one of POWELL's key goals is to keep a low profile and not be seen as commenting immediately on government policies."
