Another Federal Reserve official and Powell are at odds: the impact of tariffs on inflation may not be temporary, focus on inflation expectations

On Wednesday, this year's FOMC voting member and St. Louis Fed President James Bullard stated that it is still unclear whether the impact of tariffs on inflation will be entirely temporary. He warned that secondary effects could prompt Federal Reserve officials to maintain interest rates unchanged for a longer period:

I would be cautious about the idea that the impact of tariff increases on inflation is entirely temporary, or that a complete pass-through strategy is appropriate. I would pay particular attention to the indirect, secondary inflation effects brought about by tariffs.

Bullard pointed out that due to tariff changes and other factors, the risk of inflation remaining above the Fed's 2% target or even rising is greater, he reiterated that stabilizing inflation expectations is crucial.

Bullard distinguished between the direct effects of taxation—one-time price increases—and secondary effects that may have a more lasting impact on potential inflation.

Bullard expressed his support for the Fed's decision to keep interest rates unchanged last week and believes that a patient policy approach helps officials assess the incoming economic data. He outlined different responses officials might take, depending on the trends in the labor market and inflation:

If the economy remains strong and inflation is above target, the Fed's current policy is appropriate.

If the labor market remains healthy and tariffs produce secondary effects, officials may need to maintain moderate tightening of interest rates for a longer period or consider adopting a stricter policy stance.

If the job market weakens while inflation remains stable or eases, policy may be further relaxed.

Bullard emphasized that, given inflation is still above the Fed's 2% target, managing consumer expectations for future price growth becomes increasingly important. If inflation expectations become unanchored, the Fed may need to prioritize achieving price stability over balancing employment goals.

In a subsequent discussion, he stated: “If inflation expectations are unanchored or trending toward being unanchored in the long term, then a balanced approach may not work. At that point, we may have to focus more on addressing inflation issues to ensure that inflation expectations and actual inflation are effectively anchored.”

Bullard's team found that based on the announced tariff increases so far, if the effective U.S. tariff rate rises by 10%, the Fed's preferred inflation measure could rise by as much as 1.2 percentage points, with direct tariff effects contributing 0.5 percentage points and indirect tariff effects contributing 0.7 percentage points.

Bullard now expects inflation to reach the Fed's 2% target by 2027, which is later than his prediction last December. He mentioned that if tariffs make imported goods less attractive, leading to increased demand for domestically produced goods, prices for some domestic products may rise. However, he also clarified that not all indirect inflation effects from tariffs will be persistent.

Under the Trump administration, the uncertainty of government policy direction and its potential impact on the U.S. economy has created unprecedented uncertainty for Fed officials. Nevertheless, Bullard's baseline expectation is that the U.S. economy will continue to grow at a moderate pace, and the labor market will remain healthy The latest forecasts released after the Federal Reserve's March meeting show that, according to the median prediction, policymakers expect the equivalent of two 25 basis point rate cuts this year; among the 19 policymakers, 8 believe there will only be one rate cut in 2025 or none at all.

Last week, Federal Reserve Chairman Jerome Powell stated that the impact of President Trump's trade policies on inflation may be temporary, although he emphasized that many issues remain unclear. Powell also downplayed the soaring inflation expectations indicated by the University of Michigan consumer survey.

Clearly, Moussailem does not share this view. He is not the first Federal Reserve official to express skepticism about Powell's "temporary inflation" stance:

Another voting member, the dovish Chicago Fed President Goolsbee, pointed out that once long-term inflation expectations in the market begin to rise, it will undoubtedly be a "major warning sign." The tariff policies implemented by Trump have introduced new variables, and the Federal Reserve's next rate cut may take longer than expected