Powell remains focused on inflation
US Federal Reserve Chair Jerome Powell told the Republican-held House (of Representatives) Financial Services Committee on Tuesday that the Fed's policy position is not meant as a criticism of President Donald Trump's tariff policy.
But he said that there is the expectation among professional economists that it could have an impact because rise in tariffs would mean rise in domestic prices of the imported goods, and the rise in prices would in turn lead to rise in inflation. He said, 'We aren't commenting on tariffs. Our job is to keeping inflation under control, and when policies have short- and medium-term, meaningful, implications, then inflation becomes our job.'
Powell has been facing criticism from Trump that the Fed Chair was not reducing interest rate, which now stands between 4.25 per cent and 4.50 per cent. The American economy has not been doing too well in terms of growth. Powell has assured the committee that the economy was in a strong position. Powell is however not inclined to reduce interest rates and ease borrowing which could lead to new businesses and economic expansion.
Powell is cautious and he thinks that he should wait and watch how the tariffs that Trump has raised against all the trading partners would impact the domestic economy. As the US remains a country of huge imports, the tariffs are bound to effect the prices at home. But Trump has been single-minded in his approach to tariffs.
His argument is that compared to all other countries, the US has the lowest tariffs, and that other countries are benefiting from it, while the US is paying a price because American manufacturing has migrated. He wants to bring back the American manufacturers and make America the manufacturing hub it was till the 1960s.
Powell told the House committee: 'All the professional forecasters I know of…expect a meaningful increase in inflation over the course of this year.'
There is a huge debate whether Trump's old-fashioned approach to the economy and to manufacturing is valid. It is argued that it is but natural that American manufacturers should go to countries where the labour is cheap and the wages low. The advantage to the American consumer is that he/she gets to buy things at lower prices. With the proposed rise in tariffs, which go into effect from July 9, there could be volatility in domestic prices.
Trump believes that if American manufacturers come home and make things at home, then things will be alright. He is not taking into consideration the costs of production in America.
Interestingly, it is Trump who had chosen Powell as the Fed Chair in his first term as president. Powell is set to retire next spring and Trump is keen to find another Chair. Trump is not happy with Powell, and Trump does not hide the fact. Powell is not willing to abandon the customary caution of a central banker, and he is not the one to please the political boss as it were. Trump wants to have his way, but professional bankers and economists cannot overlook the real economy. Trump wants the ideal economy where American make their own things and buy what they make.
And also, the rest of the world buys what Americans make. The truth is that Americans are good at making some things more than other things. Japanese had started to make better and cheaper cars and they gained an upper hand.
Similarly, the computer hardware is made more efficiently in Taiwan than in America. But America retains an upper hand in terms of the Internet, and now the Artificial Intelligence (AI).
So, there is a division of labour of sorts. Trump the populist politician does not believe in the economic trends that shape the world.
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