Randall Kroszner on PCE Data, Tariffs, and the Fed's Next Moves

PCE Data and Market Reaction

• 📊 The May PCE report came in roughly as expected, with market and Fed expectations being off by less than a tenth of a percent.
• 💡 This data is broadly consistent with a very gradual return to the Fed's 2% inflation goal.

Impact of Tariffs on Inflation

• ⚠️ While Fed Chair Powell has expressed concern about the inflationary impact of tariffs, former Governor Kroszner believes the impact will be muted.
• 🎯 Tariffs are on imports, which constitute only 13% of US GDP, and ongoing negotiations are expected to avoid the highest tariff rates.
• 🛍️ Companies are actively mitigating tariff impacts through supplier negotiations, margin adjustments, and sourcing from lower-tariff regions, rather than passing costs directly to consumers.
• 📉 Kroszner does not foresee tariffs having a substantial impact that would require a significant Fed response.

Fed Policy and Economic Slowdown

• 📈 The Federal Reserve faces a trade-off between controlling inflation and potentially hurting the economy.
• 📉 Current data, including a slight decrease in consumer income and slower spending, suggests a gradual economic slowdown, which is a natural consequence of substantial interest rate increases.
• ⏳ The concept of "long and variable lags" of monetary policy, as described by Milton Friedman, highlights the uncertainty in the timing and magnitude of policy impacts.
• 🚗 The economy is showing gradual signs of slowing in both the labor market and consumption.