The Federal Reserve’s insistence that Trump-era tariffs will spur only temporary inflation is facing pushback from analysts, with deVere Group CEO Nigel Green warning that markets and policymakers may be underestimating lasting price pressures.
The critique follows the Fed’s decision to hold rates steady at 5.25% to 5.5% this week, alongside revised projections acknowledging stubborn inflation but still signaling potential rate cuts in 2025.
Chair Jerome Powell reiterated confidence that tariff-driven price spikes would prove fleeting, sparking a market rally fueled by hopes of monetary easing. Yet Green argues this optimism overlooks historical precedents and structural economic shifts. “Once inflation becomes embedded, reversing it is neither quick nor painless,” he told The Financial Times. “Tariffs raise import costs, which businesses pass to consumers. Workers then demand higher wages, creating a self-reinforcing cycle.”
Labor Market Pressures
Compounding the challenge, analysts note that Trump administration policies aimed at tightening immigration have shrunk the labor pool, forcing employers to compete for workers with elevated wages. Data released Thursday showed U.S. wage growth cooling marginally but remaining above pre-pandemic averages. Green contends this dynamic clashes with the Fed’s transitory inflation narrative. “Labor shortages and supply chain disruptions don’t exist in isolation—they amplify one another,” he said.
The Fed’s stance assumes tariffs will prompt a one-time price adjustment rather than sustained inflation. But critics highlight secondary effects: protectionist trade policies could drive firms to reshore production, incurring higher domestic labor costs. “Relocating factories isn’t cost-neutral,” Green noted. “It feeds wage growth, which central banks can’t easily unwind.”
Market Risks
Equity markets rallied post-announcement, with the S&P 500 gaining 1.2% as investors priced in future rate cuts. However, bond markets told a different story—10-year Treasury yields held near 4.3%, reflecting lingering inflation concerns. Green cautioned that persistent price growth could force the Fed to abandon projected cuts, destabilizing risk assets. “History shows markets often overestimate policymakers’ control over inflation,” he said. “The gap between expectations and reality is where volatility thrives.”
The International Monetary Fund echoed caution in its latest global risk assessment, citing trade fragmentation and labor constraints as inflationary wild cards. As central banks navigate conflicting priorities, the path to a soft landing appears increasingly narrow. For now, investors cling to the Fed’s guidance—but analysts warn the economic weathervane may be shifting.
