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Powell Says Tariffs Push Fed ‘Away From’ Goals. Reasserts Independence
Jerome Powell said words on Wednesday afternoon. Some of them were meaningful.
The Trump administra
and market drops further
Feel like these too many discussions of inflation and inflation expectations tend to gloss over a couple factors I think are important. First, once prices overcome their existing inertia and start moving around, they tend to keep moving around, albeit almost always faster on the way up than on the way down. And second, changing prices has never been easier on the retail level of this economy. No more forcing the most junior employee to put down the broom and find the pricing gun. Amazon doesn’t even need to involve a person anymore.
That’s two very good observations. Thanks. The last one, for an old fart like me, especially. I’ve never thought about the fact that price elasticity also includes at some level how quickly one can, physically, change a price on the shop floor. And the comparative advantage to be had in doing that.
Sadly, while the Fed is independent by law, Trump clearly feels that he is absolutely immune from any law or court in the nation. Not only can he shoot a citizen on Fifth Avenue. He can shoot a cop anywhere he wants.
If Trump watched Powell, or hears what he said, he’ll blast him in all caps before the end of the day. Powell was straightforward (for a Fed Chair, anyway) and, at least implicitly, said what many experts and a few others are starting to realize: Trump is causing a historic mess in the financial system that risks undermining stability in every conceivable way. Trump won’t be able to contain his fury.
The release notes mentioned a great Chicagoan Ferris Bueller…
If 25% global tariffs are maintained through 2027, recession and demand destruction may well make inflation “transitory”. Waller, Powell etc clearly know that is among the possibilities, but are not going to say it.
Anyway, probably needs to be (much?) longer than that.
Look how long it takes to build manufacturing facilities, obtain and install machinery, hire and train workers, for sophisticated large scale manufacturing.
TSM was considering/planning Arizona fabs for several years, announced its decision in 2020, and initial production is just now starting. TSM is highly profitable and able to self-fund the project. As the largest fab customer with the largest fab project, it had first call on the supply chain. Still took 5 years, or 10 if you count decision-making and planning.
Suppose every US manufacturing company tries to do the same, all at once? Including ones that are financially weak, either intrinsically or due to tariffs/recession (think automakers). Including ones without much access to financing (think small/medium businesses). Including ones that have to create a highly automated process because the manual process used in EM won’t work here (think AAPL). Including ones dependent on specialized machinery in short supply (anyone planning to use lots and lots of industrial robots) or skilled labor in short supply (many) or simply “labor” in a country without immigration (everyone) or construction/engineering and power and infrastructure (everyone).
So, assume 10 years of 25% tariffs and reshoring effort, what will the result be by 2035?
Hard to imagine, because the premise implies other things beyond just the industrial economy and you have to figure out how they play out. What does the world look like after a decade of US economic/tariff war on everyone else. What does the global financial system look like. How has the US internally maintained this policy.
Perhaps you end up with a country that does, indeed, manufacture more of what it consumes and has grown manufacturing jobs by half; has lost a larger number of service jobs and is consuming less than before after a long grinding recession; having thrown off all traces of “exorbitant privilege” but grown debt/GDP for a decade is enjoying 7-10% cost of capital; and has long ceased to be a democracy, or has somehow convinced voters that wearing patched and mended (but all American-made!) clothes and living in their (all American-made!) cars is what winning looks like.
Gosh I think I just described the USSR.
And most of the sophisticated equipment required to run the factories if you wanted to on-shore manufacturing are produced overseas (as subject to the same tariffs).