The Federal Reserve’s latest Monetary Policy Report to Congress indicates that while U.S. inflation remains somewhat elevated and the labor market is stable, the full effects of President Donald Trump’s tariffs are still uncertain and likely in their early stages. The report suggests that the central bank can afford to wait for more clarity before making any policy adjustments. “The impact of increased import tariffs on consumer prices is highly uncertain due to evolving trade policies, and it is premature to evaluate how consumers and businesses will react,” the report stated ahead of Fed Chair Jerome Powell’s upcoming testimony before Congress. Although direct effects of tariffs are not visible in official consumer price statistics, there are indications that tariffs may have contributed to recent increases in goods inflation. For example, prices for household appliances and some electronics have risen, though car price inflation has not been particularly strong despite tariff exposure. Inflation related to housing services is elevated but declining, while inflation in services like travel and dining has softened, reflecting weaker labor demand. Household and business sentiment has been affected by tariffs, though consumer spending remains resilient. However, household balance sheets have normalized, suggesting reduced capacity to handle economic shocks. The Fed reiterated its stance of waiting for more clarity on inflation and economic activity before responding to developments. The twice-yearly Monetary Policy Report reiterates familiar topics for Fed observers. Earlier this week, Fed policymakers maintained the policy rate in the 4.25%-4.50% range, awaiting further clarity on how Trump’s tariffs and other policies will influence inflation, the labor market, and the broader economy. Policymakers expect “meaningful” inflation in the coming months and predict a slowing economy with unemployment rising to 4.5% this year from the current 4.2%. Despite uncertainties, the financial system has shown resilience, although Treasury market liquidity briefly dropped following tariff announcements before improving.
— news from Reuters
— News Original —
Still early to assess tariff impact on economy, Fed report says
June 20 (Reuters) – The Federal Reserve ‘s latest Monetary Policy Report to Congress, released on Friday, said U.S. inflation is somewhat elevated and the labor market is in solid shape, but suggested that President Donald Trump ‘s tariffs have likely only begun to be felt and repeated the central bank ‘s view that it can wait for more clarity before taking action. n n”The effects on U.S. consumer prices of the increase in import tariffs this year are highly uncertain, as trade policy continues to evolve, and it is still early to assess how consumers and firms will respond,” said the report, which comes ahead of next week ‘s testimony before Congress by Fed Chair Jerome Powell. n nSign up here. n n”Although the effects of tariffs cannot be observed directly in the official consumer price statistics, the pattern of net price changes among goods categories this year suggests that tariffs may have contributed to the recent upturn in goods inflation.” n nPrices of household appliances, for instance, and some consumer electronics have risen. So far, though, car price inflation hasn ‘t been particularly strong, the report said, though autos too have been exposed to tariff increases. n nInflation related to housing services, meanwhile, is elevated but trending downward as market rent increases near their pre-pandemic averages, and inflation in services like travel, dining, and other non-housing-related items has eased, reflected softening demand for labor, the report said. n nAnd while surveys show households expect sharply higher inflation in the short-term, longer-term inflation expectations remain consistent with the Fed ‘s 2% goal, it said. n nTariffs have also weighed on household and business sentiment, the report noted. Consumer spending has been more resilient than the sentiment measures suggest, the report said, though household balance sheets have largely shrunk to normal levels, suggesting households may be “less able to weather adverse shocks than they were a few years ago.” n nThe Fed, the report said, is “well positioned to wait for more clarity on the outlook for inflation and economic activity and to respond in a timely way to potential economic developments.” n nThe Monetary Policy Report, which comes twice yearly, generally summarizes topics already well known to Fed watchers and market participants. n nOn Wednesday, Fed policymakers wrapped up their fourth rate-setting meeting this year with a decision to leave the policy rate in the 4.25%-4.50% range where it has been since December. n nCentral bankers want to see how the Trump administration ‘s tariff and other policies affect inflation, the labor market, and the economy broadly before they adjust borrowing costs. Powell said he expects to see “meaningful” inflation in coming months, and policymakers generally see the economy slowing and the unemployment rate ticking up to 4.5% this year. It is currently at 4.2%. n nThe report said that despite uncertainty the financial system has been “resilient,” and the functioning of financial markets has been orderly. In early April, after Trump announced much bigger-than-expected tariffs, Treasury market liquidity fell to levels not seen since early 2023; though financial market liquidity has since improved, “conditions remain responsive to news about trade policy.” n nReporting by Ann Saphir, Michael S. Derby and Dan Burns; Editing by Andrea Ricci