We get the latest Fed Minutes today and Fed watchers are out in droves

We get the latest Fed minutes today and Fed watchers are out in droves. Reuters has a summary from recent statement the points to high anxiety at the FOMC. The subheads have it in a nutshell: “In theory tariffs would be a "one-time" price shock. Officials worry about the influence on expectations. Recent inflation could prime businesses to hike prices again.”

“U.S. Federal Reserve officials remain uncertain about the impact tariffs might have on inflation, but have begun outlining more serious risks to supply chains, public expectations and ultimately prices as the scope of the Trump administration's plans for import taxes has become clearer.”

The haphazard, slipshod “management” style is itself a risk “The administration's piecemeal approach may in particular be damaging, Fed officials say, as businesses and consumers adjust to an outlook that seems both unpredictable and primed for higher prices.”

We were just getting so used to the idea of tariffs as to become de-sensitized. The topic had left the front page for a few days. Tariff fatigue may have set in among the public, too. We as we know, when Trump can’t dredge up anything to shock, tariff is his fallback word. That’s what happened yesterday.

It’s baaaack. Tariffs are inflationary, full stop.

A different viewpoint is that Fed speakers continue to say the Fed is data-dependent and a lousy print or two, especially in Dec and Jan, is too be expected (from seasonality). As soon as spring and summer show a drop in inflation, the Fed will be comfortable with another rate cut. Lucky for them, it will be too early for the tariff effect to have hit, and yet the average Joe is still seeing inflation everywhere. To be fair, price gouging is regional. Gas that costs $3.40 in central Virginia is over $5 in California. Eggs going for $15 (or more) in some places are $3.95 elsewhere.  

We have been known to dismiss surveys showing inflation expectations from small samples that can easily be questioned. But then former Fed economist Sahm published this one, and it’s scary.

Sahm is worried, but not hair-on-fire worried. Her fairly conventional conclusion: “The extra heat in the January CPI itself is of limited concern for the path of inflation this year. Idiosyncratic factors and uneven but ongoing adjustments from pandemic disruptions appear to be key drivers, and January will likely show progress with PCE inflation. The path back to the Fed’s target remains in place, albeit slow.

“The bigger worry that the hot January CPI reinforces is the inflation that new cost shocks such as tariffs could cause. Inflation remains elevated, and businesses have had experience raising prices to cover costs in recent years. In this environment, the risks are greater that economic policies like tariffs, which raise business costs, will be passed on fully to consumers through higher prices.”

We give a 50%+ probability to a really bad outcome. When will pre-tariff hoarding start? Again, we think it’s going to be The Great Toilet Paper War of 2025.

Forecast

Nobody knows any more what normalcy in financial markets looks like. The dollar’s gains over the past few days is down to a rise in uncertainty and riskiness, and has almost nothing to do with “real” economics. It’s conceivable that yields and the dollar can recover on those factors alone. It’s not inconceivable that under the skin, investors and traders expect that inflation push to drive yields up, although they don’t usually act so far in advance of actual data. Bottom line, nobody seems to know why the dollar is behaving the way it’s behaving, so fall back on the same excuse as Trump—it’s tariffs, all tariffs, all the time. We think the dollar “should” fall for a ton of reasons, but stay tuned.

Tidbit: The NYT has an op-ed titled “We Are Blundering Our Way Into a Financial Crisis”.

The authors are two economists from the Brookings Institution. It’s a killer essay. It’s not overspending and over-indebtedness that will drive investors away from the dollar and the US, and trigger a financial crisis. “The Trump administration has made obvious the real source of risk. It isn’t federal borrowing grinding ever higher. The true risk is our political leaders doing something wildly irresponsible that unnerves financial markets.

President Trump has brought budgetary chaos with extraordinary speed.”

There follows chapter and verse. “Those who have spent years scanning the horizon for risks of a fiscal crisis should fix their sights on the president’s malpractice. When Mr. Trump asserts he can pick and choose which payments to make, regardless of laws enacted by Congress, it is not impossible to imagine the president declaring he can pick and choose which holders of United States Treasury securities should be paid.”

Treasuries depend on trust. “What happens if investors conclude there is default risk in the largest and most liquid financial market in the world? Ernie Tedeschi at the Yale Budget Lab, a nonpartisan policy research center, shows that interest rates would rise if investors priced in the risk of a default, which would slow U.S. economic growth, even if the financial sector remained healthy.”

“… However, the financial sector probably would not remain healthy. An abrupt and sustained increase in Treasury rates of, say, three or four percentage points would likely cause a crisis. 

“… Mr. Trump is bringing chaos to one economic sector after another. More disruption is sure to come. While we can’t predict what’s going to happen, we know for sure that the risk of a fiscal crisis is higher than it was just four weeks ago.”

We say Trump doesn’t have to do a partial default, as in impounding Chinese holdings if and when China invades Taiwan. A crisis can occur on the accumulation of mismanagement, graft and grift. As we wrote a few weeks ago, if Musk goes after Social Security, it will be hordes of pitchfork-carrying white-haired old ladies marching on Washington. Interfering with Social Security is almost certainly grounds for impeachment, and this one might actually go through. The gutless Republicans depend on those white-haired old ladies to get re-elected and getting reelected is their top priority.

Tidbit: In the “So What?” box is a new Reuters/Ipsos survey on public approval of Trump. Reuters reports the overall fell one point to 44% from the last survey done January 24-26. The disapproval percentage rose to 51% in the latest poll, compared with 41% right after he took office.

They like the immigration policy “But the share of Americans who think the economy is on the wrong track rose to 53% in the latest poll from 43% in the January 24-26 poll. Public approval of Trump's economic stewardship fell to 39% from 43% in the prior poll.” And “In the latest poll, only 32% of respondents approved of Trump's performance on inflation.”

Finally, 54% oppose new tariffs on imported goods from other countries, although 49% favor tariffs on China. It’s a decent sized poll with 4,145 Americans participating, although it’s an online survey so who knows? While the outcomes seem reasonable, none of it passes the “So what?” test. Trump can afford not to care whether the public approves of him. He can’t be re-elected and is aiming for a Nobel Prize and/or some other token he thinks will write him in down in history as other than an indicted felon and a grifter. 

This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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