US Fed Policy: Will Donald Trump's Tariff Policies Pinch Jerome Powell?—Word On The Street

US Fed Policy: The US Federal Reserve is all set to unveil its fifth monetary policy verdict for 2025 on July 30, amid broad Street expectations of yet another pause on the benchmark interest rate. US President Donald Trump, a robust critic of Fed Chair Jerome Powell, has lambasted him repeatedly for not cutting the rates, calling him a "numbskull" and musing publicly about firing him.

While Fed Chair Jerome Powell says that is only one of many possible scenarios, he has argued the central bank can wait to learn more and assess the evolving data, before adjusting rates, especially with a 4.1% unemployment rate near or below estimates of full employment.

According to market analysts, Trump’s proposed tariffs could significantly complicate the Federal Reserve's policy path and might pinch Powell on policymaking decisions in the near-term, amid the global trade jitters.

"Chair Jerome Powell may be forced to delay interest rate cuts—or even consider raising rates again—if inflation expectations become unanchored, despite signs of weakening domestic demand," said Prashant Tandon, Executive Director, Global Investments, Waterfield Advisors.

Analysts believe Trump forcing Powell to cut rates presents "a situation which is a difficult trade-off: Tolerate inflation exceeding the 2% target or tighten monetary policy further and risk slowing economic growth."

"This creates a classic policy dilemma: easing monetary policy to support markets and growth could conflict with persistent inflation data, especially if price increases driven by tariffs continue," Tandon told NDTV Profit. Complicating matters further, Trump has a history of publicly pressuring the Federal Reserve, particularly during times of policy tightening.

Street experts believe Trump’s tariff agenda risks forcing the Federal Reserve into a prolonged hawkish position, potentially in the context of softening economic fundamentals, raising the spectre of stagflation.

"Powell’s key challenge would be to distinguish politically induced cost-push inflation from broader monetary dynamics, all while maintaining the Federal Reserve's credibility and communication discipline," said Tandon.

In the short term, analysts believe new tariffs are likely to increase inflation in the US and complicate the Fed's interest rate strategy. Tandon told NDTV Profit that by raising the cost of imported goods, tariffs effectively act as a tax on consumption, particularly in sectors where there are few domestic alternatives.

"As a result, producers may pass on these higher costs to consumers, leading to an increase in core goods inflation, which had previously been a factor contributing to disinflation," he said. While tariffs create cost-push inflation—distinct from inflation driven by demand—the Fed can't overlook this if second-round effects start to appear, such as high wages or broader price rise.

"In this case, Fed Chair Powell may need to postpone rate cuts or keep rates elevated for an extended period, even if economic activity is slowing down. The focus will remain on maintaining the Fed's credibility in fighting inflation and anchoring long-term expectations," he added.

US inflation came in at 2.7%, still above the 2% target, with tariff-related uncertainty keeping price pressures elevated. At the same time, the labour market remains relatively strong, with the unemployment rate unexpectedly falling to 4.1%, reinforcing the Fed’s cautious approach.

Powell had earlier indicated the possibility of two 25 bps rate cuts in 2025, but Wall Street will be watching closely for any shift in that view when the updated dot plot graph is released. Dr VK Vijaykumar, Chief Investment Strategist, Geojit Investments, told NDTV Profit in an exclusive interview that as of now, the US Fed is not behind the curve and he expects two rate cuts in 2025 by 25 bp each perhaps by September and October.

A slightly more hawkish tone could weigh on equities and give the US dollar a lift, especially if the Fed suggests rates may stay elevated for longer. Overall, volatility is likely to persist as markets adjust to the Fed’s policy trajectory considering mixed inflation and labour signals,'

However, recent sluggishness in consumer spending and signs of cooling in wage growth may still leave room for a rate cut later this year, especially if tariff uncertainty reduces in the short term," said Mayank Mundhra, FRM- VP Risk & Head Research Abans Financial Services Ltd.

Disclaimer: The views and opinions expressed by the investment advisers on NDTV Profit are of their own and not of NDTV Profit. NDTV Profit advises users to consult with their own financial or investment adviser before taking any investment decision.