Latest / The Federal Reserve Podcast with Fexingo: Interest Rates, FOMC Meetings, and Monetary Policy / What the Fed Sees in the Tariff Fight Right Now
Transcript
- Lucas: So the U.S. just proposed fresh tariffs on 60 economies — tied to forced labor trade practices. That headline landed Thursday, and it's worth asking what the Fed actually makes of it, because the knee-jerk reaction is to say 'tariffs are inflationary, the Fed will have to hike.' But it's more complicated than that. Luna: Right, because we're not talking about a broad across the board tariff like the earlier rounds. This is targeted — aimed at specific supply chains. Lucas: Exactly. And the Fed's job is to look through one-time price level shifts. A tariff on, say, textiles or electronics raises the price of those goods once. That's a level effect, not a sustained inflation rate. What the Fed cares about is whether that feeds into expectations and then into core services inflation, which is stickier. Luna: And core services inflation has been stubborn. The April core PCE — the Fed's preferred gauge — came in at 129.6, up from 129.32 in March. That's not a huge jump, but it's still moving in the wrong direction if you're the Fed. Lucas: It's moving up at a time when the Fed funds rate is sitting at 3.63 percent effective, and the daily rate is basically flat at 3.62. The market is pricing no rate cuts anytime soon. So you've got sticky core services, a tariff shock working through goods prices, and a labor market that's still adding jobs at a decent clip. Luna: The ADP private payrolls for May were 122,000 — stronger than expected. That tells you the economy isn't rolling over. Lucas: It's not. And that strength gives the Fed cover to hold steady. But here's the tension I keep coming back to: the tariff announcement targets 60 economies. That's a lot of supply chains to adjust. Even if it's not a broad tariff, the cumulative effect could look like a supply shock if it disrupts intermediate goods. Luna: And supply shocks are exactly the kind of thing that can push up inflation without a demand-side overheating. That's the nightmare scenario for the Fed — stagflation-lite. Lucas: Right. And the bond market seems to be pricing in that uncertainty. The ten-year yield is at 4.54 percent — up modestly on the week — but the long bond, the thirty-year, is sitting right at 5.00 percent. That flatness in the curve tells me investors aren't sure whether this is inflationary or deflationary over the medium term. Luna: Because tariffs could also slow global trade, reduce demand, and ultimately be disinflationary. So the curve is basically saying 'we don't know.' Lucas: Exactly. And the Fed doesn't know either — at least not yet. That's why Chair Powell keeps saying they need to see the data. But the data is noisy. The CPI for April came in at 332.4, up from 330.29. That's a 0.6 percent month-over-month rise, annualized. Not catastrophic, but not the kind of number that lets them declare victory. Luna: And the ten-year breakeven inflation rate — which is the market's expectation for average inflation over the next decade — is at 2.36 percent. That's basically unchanged. So the bond market is saying 'we don't see a lasting inflation breakout.' Lucas: Which is interesting because if you look at the headlines — Iran conflict, tariffs, sticky services — you might expect breakevens to pop. But they're flat. That suggests the market trusts the Fed to manage this, or it sees enough demand weakness coming to offset the supply pressures. Luna: Or both. And the Fed has been consistent: they're data-dependent. So the next big number is the May jobs report, out this Friday. If we see another solid number, that just reinforces the hold pattern. Lucas: Speaking of the jobs report — there's been some coverage of long-term unemployment surging. That's a different metric. The headline job numbers look okay, but the composition matters. If people are dropping out of the labor force or staying unemployed for longer, that's a signal the Fed watches on the margin. Luna: So the tariff story fits into this bigger picture: the Fed is trying to separate signal from noise. There's a lot of noise right now. Lucas: That's the whole ballgame. And honestly, if you're someone who finds this kind of economic detective work useful — walking through the data, the policy implications, the market reactions — then you probably appreciate that this show stays ad-free. No sponsors, no commercial interruptions. It's just the two of us and the data. Luna: Yeah, and that's entirely because of listeners who chip in. If you've gotten something out of these episodes, you can support the show at buy me a coffee dot com slash fexingo. It's a small way to keep us going. Lucas: And we really appreciate it. Okay — back to the tariff question. One thing I want to watch is how the Fed's own staff models incorporate these tariffs. The Fed has a whole division that builds input-output tables tracing supply chains. They can simulate the impact of a tariff on a specific sector. Luna: So they're probably already running scenarios on the 60-economy list. I'd love to see those simulations, but they won't publish them. Lucas: No, they won't. But you can infer from their public statements. If you listen to the FOMC minutes, they'll mention 'supply chain disruptions' or 'trade policy uncertainty' in a particular tone. When they start using the word 'protracted,' that's a signal they think it's going to be around for a while. Luna: And the longer it goes, the more it could feed into inflation expectations, even if the direct price impact is one-time. Lucas: That's the risk. The Fed can look through a one-time price increase, but if it changes behavior — if firms start raising prices preemptively because they expect higher input costs, or workers demand higher wages because they see prices going up — then it becomes self-fulfilling. Luna: And that's exactly what core services inflation captures. So the tariffs are a wildcard for that metric. Lucas: Wildcard is the right word. And it's one of several. The Iran situation, the labor market, the fiscal side — there's a lot for the Fed to juggle. But as of June 2026, the stance is clear: hold steady, watch the data, and don't overreact to any single headline. Luna: Which is probably the right approach. Overreacting to the tariff news could do more harm than good. Lucas: Agreed. So the takeaway for today: the tariff fight is real, it's on the Fed's radar, but it's not yet a game-changer for policy. The data that matters most is still the core inflation and labor market numbers. We'll get more on Friday with the jobs report, and then we'll have a clearer picture. Luna: Always more data. Thanks, Lucas. Lucas: Thanks, Luna. See everyone next time.