The Federal Reserve is still a bit spooked by President Donald Trump's tariffs, even as evidence shows they have not hurt the economy so far. The minutes from the Fed's latest meeting reveal a continued "cautious approach" moving forward, amidst concerns that tariffs will lead to higher inflation or even stagflation. That has the Fed unlikely to move on interest rates at its next meeting in June, while the markets are still pricing in the possibility of one or two rate cuts by the end of the year.
The Fed's tariff jitters are a bit of a head-scratcher for some analysts, as recent reports have shown inflation continuing to decrease and employment remaining strong even after Trump enacted tariffs on most foreign countries. "Stagflation has to do with rising unemployment and rising inflation, and we don't have either," says Richard Rosso, certified financial planner. "So I don't know when they changed the definition of stagflation, but it's definitely not that."
The Fed's gloomy forecast is also questionable considering its poor record in predicting inflation during the Biden administration. In 2021, amidst clear evidence of rising inflation, the Fed repeated the Biden administration talking point that rising prices were only "transitory," until it was forced to act a year later when inflation reached a 40-year high. Then, as Rosso points out, the Fed cut interest rates multiple times last year when inflation was higher than it is now.
All of this inconsistency and inaccuracy may cause the markets to tune out the Fed, which Rosso believes is a good thing. "We don't want the markets so dependent on the Fed cutting interest rates, which they have been since the (2008) financial crisis," he tells KTRH. "So maybe this breaks the connection for awhile, and we start focusing on what we should, like corporate earnings and margins and those things, as opposed to what's the Fed gonna do."
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