In light of the new tariffs imposed by President Trump and the sharp increase in the price of oil (Brent was above $100 this weekend but has fallen equally sharply to start the week), questions about Federal Reserve policy have flared again. Nothing has changed in the original calculus that has encouraged the Federal Reserve to eschew raising interest rates to restrain inflation; the inflationary pressures are caused by supply-side factors that should be temporary (“transitory”), with tariffs having a one-time effect on the rate of inflation and oil prices expected to fall when the conflict in the Persian Gulf ends. And yet . . . The new tariffs come on top of price hikes associated with previous tariffs that are commonly thought still to be fully witnessed. The conflict in the Persian Gulf seems never-ending, may yet to turn into a permanent tax on oil, via transit tolls, and has expanded to the Red Sea chokepoint controlled by the Houthis. At a certain point, monetary authorities begin to question whether an inflation problem originating in a supply shock over which they have little control becomes a demand-side problem that they can, and must, address. In this logic, strong consumer demand makes it possible for businesses to pass along price increases that would otherwise need to be absorbed in profit margins. In the last two months, interest rates have been raised by the European Central Bank, the Bank of Japan, the Bank of Korea, the Reserve Bank of New Zealand and the Bank of Israel. Over the weekend, Singapore monetary authorities, who control monetary policy via managing the US dollar exchange rate, tightened monetary policy as well, citing the anticipated inflation from newly high oil prices. Central bankers talk to each other, frequently, and often coordinate their actions. Those central banks that have held rates steady as their peers have acted may increasingly find this to be an environment demanding action.
Data to Watch
- Federal Open Market Committee (FOMC) Interest Rate Decision and Press Conference, Wednesday, July 29
- US GDP growth rate, Second Quarter (first estimate), released Thursday, July 30
- US Personal Consumption Expenditure (PCE) Price Index for June, released Thursday, July 30
