Inflation's perfect timing

Politico

2 days ago

Editor's note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our subscribers each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day's biggest stories. Act on the news with POLITICO Pro.
Quick Fix
Businesses have largely shielded their customers from sticker shock in the months since President Donald Trump began slapping expensive tariffs on imports. As corporate tax bills for new imports continue to balloon, their ability to spare Americans from higher prices is likely to fade.
For Federal Reserve Chair Jerome Powell, the tariff-related price increases are poised to arrive at the same time the central bank confronts signs of a weakening labor market and slowing economic growth. That combination presents a serious challenge to the Fed's mandate to keep a lid on inflation while maximizing employment — just as Powell is under relentless attack from Trump over his resistance to cutting interest rates.
'What we're beginning to see and anticipate in the data is the tension in the Fed's dual mandate that many were expecting when the higher tariffs were rolled out,' said Deutsche Bank's U.S. Chief Economist Matthew Luzzetti. 'How do you think about higher inflation prints versus potentially weaker labor market data?'
Economists expect today's Consumer Price Index report to show that inflation climbed at an annual rate of 3.1 percent in July, excluding food and energy costs. Monthly inflation data is volatile — and Bureau of Labor Statistics reports have been chock-full of surprises in recent months — but an acceleration in goods prices would be yet another sign that Trump's trade agenda is weighing on American pocketbooks.
There has been 'a meaningful pickup in core goods prices, and we anticipate that that will continue over the next several months,' Luzzetti said.
Goldman Sachs economists estimate that consumers absorbed just 22 percent of tariff costs through June, while businesses ate up nearly two-thirds of the levies. But they expect the consumer share to climb to 67 percent by October — based on how previous import duties impacted prices — and that domestic producers will also raise prices.
Those price hikes have been widely telegraphed in private surveys, as well as the Fed's own research. All told, Goldman's economists expect the Fed's preferred inflation gauge (the core personal consumption expenditures price index) to climb to an annualized rate 3.2 percent annualized by year-end, compared to just 2.4 percent without tariffs.
Economists broadly expect inflation to remain well above the central bank's 2 percent target through the end of the year. That would preclude any interest rate cuts in a normal economic or political environment. But the massive downward revisions in last month's jobs report — which led to Trump's surprise firing of Bureau of Labor Statistics Commissioner Erika McEntarfer — has hastened calls for the Fed to bring down rates to prop up hiring.
Fed officials like Vice Chair Michelle Bowman and Gov. Christopher Waller have made a case that tariffs will only have a one-off effect on prices and that the central bank needs to lower rates to encourage hiring.
The July jobs report bolstered their case. Fed Gov. Lisa Cook, San Francisco Fed President Mary Daly and Atlanta Fed President Raphael Bostic have separately expressed concerns about the labor market in public remarks. The market has now priced in an 85 percent likelihood that the Fed will lower short-term interest rates by a quarter point at its next meeting in September, according to CME's FedWatch tool.
But if Goldman's analysis is correct — and today's CPI report shows even more evidence of tariff-related price spikes — Powell & Co. could find themselves in quite the pickle. Businesses have only just begun to digest import duties that took effect in July and August. It could take months before consumer prices reflect the full impact.
'We're engaged in one of the greatest macroeconomic experiments in history,' said Unlimited Funds Co-Founder, CEO and CIO Bob Elliott. The 'peak of the tariff impact on inflation is probably hitting right around the end of the year.'
It's TUESDAY — Right in time to define the 2024 midterms! For econ policy thoughts, Wall Street tips, personnel moves or general insights, email Sam at [e-mail].
Driving the Day
The NFIB's Small Business Optimism Index will be released at 6 a.m. … The Labor Department will release the Consumer Price Index for July at 8:30 a.m. … Richmond Federal Reserve Bank President Thomas Barkin speaks at 10 a.m. … Kansas City Fed President Jeffrey Schmid speaks on monetary policy and the economic outlook at 10:30 a.m. …
Start your engines — Trump named the Heritage Foundation's Chief Economist E.J. Antoni has his pick to lead the Bureau of Labor Statistics. Antoni – a longtime Trump booster and an ally of Steve Bannon – is likely to face fierce opposition from Democrats who were incensed at the firing of former BLS Commissioner Erika McEntarfer.
Another extension — Trump has signed an executive order to extend a tariff truce with China for another 90 days, per Ari Hawkins, Doug Palmer, Daniel Desrochers.
One way of doing business — Trump brushed aside national security concerns and defended a deal he struck with Nvidia CEO Jensen Huang to allow the sale of certain semiconductor chips to China in exchange for the company giving the U.S. government 15 percent of the revenue, per Doug Palmer and Ari Hawkins.
Bessent on Bessent —From Bloomberg's Daniel Flatley and Erik Schatzker: 'Bessent has grown used to explaining how he reconciled his personal beliefs with the extremes of Trump's MAGAsphere. 'I was kind of despondent about what was going on with the Biden administration,' he says. Bessent thought US industry was being suffocated by overregulation and objected to the amount of government spending on social programs that, in his view, weren't helping to create pathways to prosperity for ordinary Americans. The political establishment, both Republican and Democratic, had failed. 'We've gotten away from Main Street capitalism,' he says. 'And I am deeply worried that no one trusts these parties now.''
Fed File
Bigger pool — Trump advisers have expanded their search for the next Fed chair to include Bowman, Vice Chair Philip Jefferson and Dallas Fed President Lorie Logan, according to Bloomberg's Saleha Mohsin. Powell's term as chair expires in May.
Miran's next steps — A White House official granted anonymity to discuss transition plans tells MM that Council of Economic Advisers Chair Stephen Miran will continue to serve in his current capacity as he prepares for Senate confirmation to a temporary seat on the Fed's Board of Governors. CEA Vice Chair Pierre Yared will be elevated to acting chair upon Miran's confirmation.
— And though Miran will continue to appear on TV and at public events to discuss the administration's economic policies, he will not be commenting on the Fed, his nomination or monetary policy, said the official.
— Miran's previous calls for changes to the central bank's governance — along with Trump's frequent critiques of Fed rate decisions — have fueled speculation around how he'll wield influence as a temporary member of its board of governors.
On the Hill
First in MM: Banks vs. crypto — A coalition of bank trade associations is calling on lawmakers to crack down on crypto exchanges paying interest to users who hold stablecoins, citing concerns about deposit flight, Jasper Goodman reports.
In a note to lawmakers shared first with MM, leading bank groups including the Bank Policy Institute, the American Bankers Association and the Independent Community Bankers of America wrote that 'it is important that the requirements in the GENIUS Act, now signed into law, prohibiting the payment of interest and yield on stablecoins are not evaded or undermined.'
The stablecoin law, which Congress passed last month, bars issuers from offering yield-bearing stablecoins. But big crypto players are still planning to offer 'rewards' to stablecoin holders through exchanges, sparking concern for Wall Street. Coinbase CEO Brian Armstrong said on an earnings call last month that the firm, which operates the largest U.S. crypto exchange, plans 'to continue to pay rewards to our customers, which are very competitive.' Coinbase lists stablecoins on its exchange, but does not issue the tokens.
The bank groups said that 'without an explicit prohibition applying to exchanges, which act as a distribution channel for stablecoin issuers or business affiliates, the requirements in the GENIUS Act can be easily evaded and undermined by allowing payment of interest indirectly to holders of stablecoins.'
SBA system security DOGE concerns — House Small Business ranking member Rep. Nydia Velázquez (D-N.Y.) sent a letter to Small Business Administrator Kelly Loeffler expressing 'serious concerns' about potential widespread access granted by the SBA to DOGE employees and discrepancies in recent reporting from WIRED and Loeffler's testimony before Congress, Katherine Hapgood reports.
'The speed with which SBA granted access makes clear that [SBA] failed to protect personal information by bypassing the standard screening and security clearance processes required of government employees who handle sensitive information,' Velázquez said.
The Economy
Slightly optimistic but still uncertain — The National Federation of Independent Business's July small business optimism index released Tuesday was a mixed report, with improvements to the optimism index but a definite increase in the uncertainty index. The optimism index increased by 1.7 points and the uncertainty index increased by 8 points.
'Small business sentiment remains moderate, although it ticked higher this month. This is not conducive for investment spending needed to improve our productivity and produce new goods and services.'