Fed response to trade war

[dougules]

So Jay Powell said that the federal reserve would “act as appropriate to sustain the expansion" in a trade war.  Some articles interpreted that as lowering rates. 

Wouldn't tariffs in a trade war cause rapid inflation?  If so, wouldn't lowering rates in the face of inflation be counter-productive? 

[PDXTabs]

I mostly agree, but they have a dual mandate. They are supposed to keep inflation in check while trying to guarantee full employment. They might think that until the inflation actually shows up that they don't need to act to keep it at bay, which is pretty reasonable.

[Financial.Velociraptor]

What makes you think  tariffs are inflationary?  "Always and everywhere, inflation is a monetary phenomenon" -- Milton Friedman

Money supply has to exceed money demand for there to be inflation.  Tariffs don't change the money supply, only how it is distributed in a foreign trade exchange.

[Indexer]

What makes you think  tariffs are inflationary?  "Always and everywhere, inflation is a monetary phenomenon" -- Milton Friedman

Money supply has to exceed money demand for there to be inflation.  Tariffs don't change the money supply, only how it is distributed in a foreign trade exchange.

Agreed, at the marco level inflation is primarily driven by the money supply. I see where people think tariffs can be inflationary because tariffs can cause the prices for certain products to rise. It comes down to what's driving the price increases.


Are prices rising because of a higher tax on the products or are prices rising because there is excessive demand?
 
Taxes, including tariffs: The Fed would likely ignore it unless it posed a threat to maintaining full employment. If the prices rose enough they could decrease demand, which could pose a threat to employment. This would prompt the Fed to lower rates.

Excessive demand: The Fed would likely view this as inflationary and raise rates.

[PDXTabs]

What makes you think  tariffs are inflationary?

Agreed, at the marco level inflation is primarily driven by the money supply.

The Fed has said that it will measure inflation (primarily) with core PCE. It seems to me that if you have enough tariffs on enough goods from enough countries that it will push up core PCE.

[Indexer]

The Fed has said that it will measure inflation (primarily) with core PCE. It seems to me that if you have enough tariffs on enough goods from enough countries that it will push up core PCE.

The Fed actually tracks prices 12,000+ different ways. https://fred.stlouisfed.org/categories/32455

Given that data, I think they can determine whether the inflation is being driven by increased demand, supply side constraints, or tax increases. The Fed is by no means perfect, but I think comparing prices and sales pre-tariffs to post-tariffs is easier than the questions they are normally trying to answer.

[PDXTabs]

The Fed actually tracks prices 12,000+ different ways. https://fred.stlouisfed.org/categories/32455

I never said otherwise, but federalreserve.gov clearly states that [t]he Fed often emphasizes the price inflation measure for personal consumption expenditures (PCE), produced by the Department of Commerce, largely because the PCE index covers a wide range of household spending.

[PDXTabs]

I thought that I should add that the FOMC never said that they were going to cut rates. They said that they "are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective." - https://www.federalreserve.gov/newsevents/speech/powell20190604a.htm

[Classical_Liberal]

What makes you think  tariffs are inflationary?  "Always and everywhere, inflation is a monetary phenomenon" -- Milton Friedman

Money supply has to exceed money demand for there to be inflation.  Tariffs don't change the money supply, only how it is distributed in a foreign trade exchange.

What about supply side inflation?  Or Cost-Push as the Neokeynesians call it. If, in fact, a multifront trade war eliminates the international supply of cheap consumer goods the US has been relying upon for two decades, we have a problem.  Monetary policy will not solve supply side inflation.  We have to solve for the increased cost in supply.  Seems easy enough to do, just turn off the tariffs.  The problem is that if this lasts too long the damage may be done. Both politically (ie China and Mexico and whoever else may say F-you), and because US companies will have to change very carefully crafted supply lines in meantime, switching both ways are sunk economic costs.

[MaaS]

Escalating trade wars and economic measures are plummeting, but markets race towards all-time highs on the expectation of a rate cut. Yet another example of why the stock market is unpredictable.

Interesting times.