Something changed between December and January this year, when Powell put a stop to rate cuts and held Fed rates since then. Jerome Powell has a singular argument that the tariffs are likely to impact inflation a lot more than jobs or even GDP growth. He believes that the impact of reciprocal tariffs on inflation will not only be immediate, but also be fairly structural. This has induced Powell to hold status quo on rates, despite the pressure building up to cut Fed rates. 

Let us look at the PCE inflation data that the US BEA announced this week. At 2.6% headline PCE inflation and 2.9% core inflation; price situation continues to be a worry for the Fed. With the core inflation a full 90 bps higher than the 2% target, any hopes of inflation back at 2% is quite remote. Also, Powell is right in his assessment that inflation will have an immediate and lasting impact. Since April, PCE inflation has moved up on a consistent basis. Clearly, the steep tariffs on Indian and other products are putting a lot of pressure on US prices. In these circumstances, Powell has a case for being wary of a Fed rate cut. 

In the first quarter of 2025, when GDP growth had contracted by -0.5%, most economists had called for rate cuts. At that point, Powell had argued that the de-growth was temporary as it was led by front-loading of imports ahead of the tariff imposition. He was right; in that the growth bounced back to 3.0% and 3.3% as per the first and second GDP estimates for Q2, showing that growth was never the issue. The second area where Trump proved to be right was on jobs. Even Waller and Bowman of the Fed had called for rate cuts over jobs, but Powell maintained that it was more a sign of stability and AI-related job cuts. He has once again proved right! 

That still remains a million-dollar issue, as to whether we will see a rate cut in September. The data supports Powell in maintaining status quo on rates, but the monetary policy is as much about optics as it is about action points. When the inflation was rising, Powell was accused of being too late on rate hikes. Now, he is getting blamed for being too slow on rate cuts. Powell realizes that cutting rates by 25 bps will have a very limited impact amid the overpowering impact of tariffs. At the same time, he cannot be accused of being behind the curve on cutting rates. On the way down, Powell may cut rates more to take care of the optics, than monetary policy reasons!