Did Fed Chair Jerome Powell Just Throw President Donald Trump Under The Bus Regarding Inflation?

The The third year of Wall Street’s bull market rally did not disappoint. When the closing bell rang on December 31, the iconic Dow Jones Industrial Average (DJINDEXES: ^DJI)very followed S&P 500 (SNPINDEX: ^GSPC)and driven by growth Nasdaq Composite (NASDAQINDEX: ^IXIC) rose 13%, 16% and 20% in 2025. For the S&P 500, it marked the third straight year of gains of at least 16%.

While technological trends are certainly fueling this recovery (for example, the evolution of artificial intelligence and the advent of quantum computing), it can be argued that the Federal Reserve’s ongoing rate easing cycle is just as, if not more, important.

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Jerome Powell speaking with Donald Trump outside the Federal Reserve headquarters. — Fed Chairman Jerome Powell speaking with President Donald Trump. Image Source: Official White House Photo by Daniel Torok.

Although the Federal Open Market Committee (FOMC) – The 12-person body, including Fed Chairman Jerome Powell, responsible for implementing and directing our nation’s monetary policy, chose to keep the target federal funds rate unchanged at last week’s meeting, having made cuts of 25 basis points at each of the previous three meetings.

Lowering the fed funds rate ultimately lowers borrowing rates for consumers and businesses. This can encourage lending, leading to increased hiring, acquisition activity and innovation for businesses. In other words, it is seen as a positive for the US economy and stock market.

But things may not be as perfect as the rapid rise in the Dow, S&P 500 and Nasdaq Composite indicate. In Powell’s prepared remarks after the Jan. 28 FOMC decision, he noted that inflation “remains somewhat elevated relative to our long-term 2% objective” and blamed that on one factor: President Donald Trump’s tariffs.

While Powell made sure to add the distinction that the tariffs will eventually pass and allow the current inflation rate to move toward the Fed’s long-term target of 2 percent (assuming President Trump doesn’t add additional tariffs), he explained that the “somewhat elevated” inflation rate currently “largely reflects inflation in the goods sector, which has been boosted by the effect of the tariffs.” In comparison, the country’s central bank has seen disinflation in the services sector.

Fed Chairman Powell elaborated further in a question-and-answer session with reporters after his prepared remarks that “there is an expectation that at some point in the middle of the year, we’ll see tariff-rate inflation peak.”

In other words, things are expected to get a little worse before they start to get better, which is all the more reason for the country’s central bank to be hesitant to cut interest rates aggressively.

Donald Trump delivering remarks in the East Room of the White House. — President Trump delivering remarks. Image source: Official White House photo by Shealah Craighead, courtesy of the National Archives.

In early April, Trump unveiled his long-held trade policy by introducing a global tariff of 10 percent, as well as higher “reciprocal tariffs” on dozens of countries deemed to have adverse trade imbalances with America. These reciprocal tariffs have changed several times as trade deals have been announced or tariff breaks have been extended.

Donald Trump’s goal with the tariffs is to boost domestic production and protect American jobs. If tariffs increase the cost of imported goods, multinational companies will be incentivized to manufacture their US-centric products on American soil. But things don’t always work out in the real world the way they do on paper.

In December 2024, four New York Federal Reserve economists, writing for Liberty Street Economics, published a report (“Do Import Tariffs Protect US Companies?”) examining the effect of Trump’s 2018-2019 China tariffs on the US economy and stock market.

Perhaps the least surprising finding was that publicly traded companies directly affected by Trump’s China tariffs during his first term underperformed on tariff announcement days.

However, there were two more important takeaways from the Liberty Street Economics analysis that hit home with the US economy and stock market.

First, the average public company affected by Trump’s China tariffs experienced declines in labor productivity, employment, sales and profits from 2019 to 2021. In other words, the adverse impact of the tariffs lasted well beyond their initial announcement.

The second, and perhaps more important, concern is that the entry tariffs adversely affected American businesses. An input tariff is a duty imposed on an imported commodity that is used to complete the domestic manufacture of a product. Tariffs were found to increase domestic production costs, making American products less competitive with those from China. These higher costs were typically passed on to American consumers, which may increase the prevailing inflation rate.

While what happened in the past can’t guarantee what will happen in the future, Powell’s projection of a peak in tariff-induced inflation in the middle quarters of 2026 would indicate that history is somewhat repeating itself.

In addition, Powell made it clear that the FOMC’s inflation assumptions were based on President Trump not adding additional tariffs. However, Trump’s trade policy approach has been inconsistent, with the president threatening to impose tariffs and wavering on his claims to do so on several occasions since last April.

While a historical level of division at the Federal Reserve is a big own problem for the Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite, the impact of President Trump’s trade and tariff policy, based on historical data, should not be overlooked. Tariffs risk creating unique challenges that a historically expensive stock market may struggle to address.

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Did Fed Chair Jerome Powell Just Throw President Donald Trump Under The Bus Regarding Inflation? was originally published by The Motley Fool

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