The Fed Ignores Falling Inflation, Raises Alarm Bell Over Tariffs
The Federal Reserve announced definitively on Wednesday that President Trump’s tariff policies are forcing a more aggressive stance on inflation. Despite recent signs of cooling, the central bank opted to hold rates steady but raised its inflation outlook sharply—and warned that rate cuts remain unlikely until concrete tariff-driven price pressures materialize.
Inflation is clearly slowing. Over the past three months, headline PCE—the Fed’s preferred measure—has annualized at around 1.6 percent, while core PCE (excluding food and energy) tracks at roughly 2.2 percent. On a year-over-year basis, headline PCE weighed in at 2.1 percent in April, and core PCE came back to 2.8 percent, down from peaks near 3.7 percent last summer. CPI has behaved similarly, with core CPI marking its weakest three-month pace since early 2021.
This data suggests inflation has cooled comfortably below the Fed’s two percent goal—or is at least close enough that many Fed watchers predicted the central bank would pivot toward easing. Yet on Wednesday, the Fed lifted its forecast for core PCE in 2025 to 3.1 percent, up three-tenths from March’s median projection. This detour from the data-centered path makes one thing clear: the Fed isn’t reacting to current conditions. Instead, it’s raising a preemptive shield against tariff risks.
Tariffs: The Fed’s New Inflation Frontier
“Increases in tariffs this year are likely to push up prices and weigh on economic activity,” Fed Chair Jerome Powell told reporters, putting the blame squarely on trade policy. He elaborated that “everyone I know is forecasting a meaningful increase on prices from tariffs because someone has to pay.” That’s more than cautious language—it’s a declaration of intent. The Fed is explicitly crediting tariffs with transforming its inflation outlook, even as those duties haven’t yet registered in consumer price data.
Powell also emphasized the uncertainty of this new terrain, noting: “We haven’t been through a situation like this… The size, duration and timing of the pass-through are all highly uncertain.” That phrasing didn’t just acknowledge unknowns—it framed them as a justification for staying the course. If leadership is admitting uncertainty now, how much more reason does it have to act preemptively?
He added that the Fed expects more learning on this front in the coming months. “We’re going to learn a great deal more over the summer on tariffs,” he said. Until then, the Fed is treating trade policy as a latent inflation bomb—one that must be defused before it blows.
Falling Expectations Don’t Sway the Fed
It’s not just actual inflation that’s softening—expectations are falling too. The University of Michigan’s consumer survey shows one-year inflation expectations plunged from 6.6 percent in May to just 5.1 percent in June. While long-term expectations remain elevated at around 4.1 percent, they too have eased from recent highs. On the business side, the Atlanta Fed’s monthly survey indicates firms now expect 2.4 percent inflation over the next year, the lowest reading since February. This suggests both households and businesses see inflation cooling, not accelerating.
Yet these indicators barely registered in the Fed’s calculus. In Powell’s words, “policy is probably modestly restrictive” but not adjusted in response to these recent drops in expectations. Far more weight is being given to anticipated tariff pressures, even though they have yet to manifest.
Dot Plot Divide: Caution Versus Dovishness
The Fed’s dot plot charted a split outlook. Although ten officials expect at least two rate cuts in 2025, seven—up from four—now predict no cuts at all. That change shifted the median forecast to maintain 3.9 percent by year-end 2025, unchanged from March but reflecting a more hawkish bias. Powell summarized what lies ahead: “I would focus most on the nearer term,” noting that more distant forecast points carry even greater uncertainty.
Powell repeatedly defended the hold, arguing that the Fed would prefer to stand firm until the effects of tariffs—or lack thereof—are more apparent. Responding to concerns over data dependence, he said, “As long as the economy remains solid and inflation is moving down, policymakers think the right thing to do is stay where we are with regard to policy.” But the key qualifier is the fear that tariffs could reverse those trends, prompting a defensive shift. “Today, the size of the tariff effects and their duration and time it will take are all highly uncertain,” he reiterated.
Powell also emphasized the Fed’s institutional independence. Asked whether political pressure played any role, he affirmed that decisions are data-driven, not politically driven. In this case, however, the Fed’s decision rests on projected inflation rather than actual inflation—whose sources happen to trace directly back to Trump’s trade decisions.
Signal to Markets: Expect Hawkishness, Not Easing
Investors hoping for rate cuts this year may want to temper their expectations. Even though the median dot plot predicts two cuts, an increasing faction pushes against any cuts, and the forecast for 2026–27 nudges rates slightly higher. Powell summarized the new policy stance succinctly: “With uncertainty as elevated as it is, no one holds these rate paths with a lot of conviction.” In other words, the Fed isn’t locked into a path, but it’s signaling that reevaluation—and not rapid easing—is on the table.
A “Trump” hat hangs over the monitor on the floor of the New York Stock Exchange as it broadcasts Fed Chairman Jerome Powell’s press conference on June 18, 2025. (Michael Nagle/Bloomberg via Getty Images)
Powell went on to underscore that the Fed intends to maintain this caution until evidence of tariff impacts becomes clear. “We feel like we will learn a great deal more over the summer about tariffs,” he said. For now, though, the central bank sees no compelling reason to move away from a restrictive posture.
The Fed’s message couldn’t be clearer: tariffs aren’t just trade policy—they’re monetary policy risk. When your central bank identifies domestic tariffs as the primary threat to price stability, it becomes a check on political agendas. This dynamic marks a shift from purely data-driven policy to a more strategic, anticipatory stance. And while current inflation and expectations are subdued, the Fed’s inflation forecast remains elevated.
Put simply, Powell has drawn a line—and it runs not through markets or monetary models, but right through America’s ports, factory floors, and the White House. That line is against tariffs, sovereignty, and the broad Trump economic agenda.
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