Executive Summary:
A dovish faction has been forming within the Federal Reserve Board, dissenting from Chief Powell’s hawkish party line. Rather than wait and see whether tariffs deliver greater blows to the economic or the inflation outlook before changing monetary-policy course, the doves claim that the economy is more vulnerable and espouse lowering the federal funds rate sooner rather than later. Dr Ed sides with Powell & Co. So does the data: So far, there’s more evidence of tariff-induced inflationary pressures than economic weakness. ... Also: The recent stock market correction partly reflects late January’s revaluation of tech stocks in reaction to the Deep Six ramifications. Now investors may be embracing the Mag-7 once again … Check out the accompanying chart collection.
Fed I: Waller vs Powell.
The financial markets have been obsessed with Trump’s Tariff Turmoil (TTT), and rightly so. That means that the financial markets have been less preoccupied with the Fed. Indeed, Fed Chair Jerome Powell has signaled several times that monetary policy is on hold because of the uncertain economic effects of TTT. While the tariffs are likely to slow economic growth, they are also likely to boost inflation, at least temporarily.
Last Thursday, Fed Governor Christopher Waller publicly dissented from the relatively hawkish party line promoted by Powell & Co. in recent weeks. His dovish stance is that TTT is likely to weaken the labor market in coming months, while any inflationary pressures are likely to be temporary. So he is ready to lower interest rates sooner rather than later.
It’s becoming apparent that Waller is doing his best to ingratiate himself with Trump & Co. so he might be considered as a candidate to replace Powell when his term as Fed chair expires in May 2026. Stock investors liked what Waller had to say on Thursday. Joining Waller’s parade that day was Cleveland Fed President Beth Hammack. In a separate interview, she said the central bank might reduce interest rates as early as June if it were to have clear evidence of the economy’s direction by then.
We side with Powell & Co. So far, the data show that consumer spending and the labor market remain remarkably resilient. At the same time, inflationary pressures are mounting, according to regional and national business surveys. Consumers’ inflationary expectations are also rising.
Let’s compare the recent comments coming from the Waller camp versus the Powell camp:
(1) “It wouldn’t surprise me that you might start seeing more ...
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