Joe Lavoie: Tariffs Don't Cause Inflation, Fed Should Cut Rates

Tariffs and Inflation

• 💡 A study by the Council of Economic Advisors indicates that tariffs do not cause inflation.
• 📊 Goods prices in the Personal Consumption Expenditure (PCE) deflator, the Fed's preferred measure, rose only 1.1% annually from December to May, which is below the Fed's 2.0% target.
• 📉 Imports of goods were actually 50 basis points lower than overall PCE goods, and the Consumer Price Index (CPI) for these goods fell even more.
• 💰 Producers have absorbed the cost of tariffs into their margins, with the US as the largest consumer dictating terms.

Federal Reserve Policy and Rate Cuts

• ⚠️ The Federal Reserve has not lowered the Fed funds rate despite inflation being below target.
• 🗣️ Fed Governor Chris Waller has stated that the data is good and he would support a rate cut as soon as July, not viewing tariffs as inflationary.
• 🎯 There is a critique of Fed groupthink, with a call for dissenters like Waller and Bowman if a rate cut is not made in July.
• 📈 Inflation has consistently underperformed expectations, the labor market remains tight, and long-term inflation expectations are stable, which is considered great news.

Economic Outlook and Debt

• 🚀 Lower market rates are expected to be supported by the current economic news.
• 💸 Lower interest rates and a reduced yield curve would lead to significant savings on national debt interest expense, estimated at $300 billion to $600 billion.
• 🔍 The Treasury market shows yields below the high end of the Fed funds rate range, suggesting the market anticipates inflation will come down.
• ⚔️ There is a perception that the Federal Reserve is in conflict with President Trump's administration.