Charles Payne: A wave of Fed hawks have been going nuts about this

Key Concepts

• Tariff Policy
• Unemployment
• Inflation
• Monetary Policy
• Restrictive Policy
• Deflationary Period
• Price Hike

San Francisco Fed Publisher Review: 150 Years of Tariff Policy

The San Francisco Fed's review of 150 years of tariff policy concluded that tariff hikes lead to increased unemployment and decreased inflation. This finding directly challenges the common argument that tariffs are inflationary.

Historical Context and Economic Theory

• Inflationary Argument: Historically, tariffs were often viewed as inflationary. An example cited is the "Sweet Holly" situation, which is described as "nuts" and associated with the greatest deflationary period.
• Jay Powell's Stance: Former Fed Chair Jay Powell previously suggested that higher prices could be a cure for higher prices, implying a self-correcting mechanism. This perspective is visualized on a chart where inflation decreases as unemployment rises.
• Administration's Counter-Strategy: The administration aimed to counter the inflationary aspect of tariffs through trade deals. An example is Saudi Arabia's commitment increasing from $600 billion to $1 trillion, with trillions in other commitments and job creation, in the hope of lowering inflation. However, these measures are noted to take time.

Federal Reserve's Current Stance on Tariffs

• Jay Powell's Reversion: Jay Powell has returned to viewing tariffs as a one-time price hike, likening their effect to a rolling stop at a traffic light.
• Hawkish Fed Members: A wave of hawkish Fed members have been vocal about tariffs, citing them as a reason to maintain restrictive monetary policy.
• Governor Chris Waller's Dissent: Governor Chris Waller has publicly disagreed with his hawkish colleagues. He stated, "Above target or tariffs are going to cause a bunch of inflation, it ain't happening. Should have happened, we are not forecasting it." This indicates a divergence of opinion within the Fed regarding the inflationary impact of tariffs.

Logical Connections and Key Arguments

The transcript highlights a debate within economic policy and the Federal Reserve concerning the impact of tariffs. The core argument presented is that the San Francisco Fed's historical review contradicts the notion that tariffs are inflationary. Instead, the review suggests the opposite: tariffs raise unemployment and lower inflation. This challenges the rationale used by some Fed members to justify restrictive monetary policy. The administration's efforts to use trade deals to combat inflation are presented as a separate, albeit related, strategy that requires time to yield results. Governor Waller's statement serves as a direct refutation of the hawkish view, emphasizing that the predicted inflationary effects of tariffs are not materializing.

Conclusion

The main takeaway is that recent analysis from the San Francisco Fed suggests tariffs have a deflationary impact, increasing unemployment while lowering inflation. This contradicts the views of some hawkish Federal Reserve members who are using tariffs as a justification for maintaining restrictive monetary policy. While the administration is pursuing trade deals to manage inflation, their effects are expected to be gradual. Governor Chris Waller's dissenting opinion underscores the ongoing debate and differing perspectives within the Federal Reserve on the economic consequences of tariff policies.