In the Market-How the ghost of ‘transitory’ inflation is haunting the rate debate

Economic

Summary:

The debate over Trump’s tariffs reignites concerns about inflation. While officials like Lavorgna downplay their impact, others warn of gradual, lasting price pressures. The Fed appears increasingly divided as uncertainty grows.

Joseph Lavorgna, counselor to Treasury Secretary Scott Bessent, believes tariffs are not inflationary and says economists who have been predicting that prices would rise due to President Donald Trump’s import duties are wrong.

Where many such economists saw effects of tariffs in consumer price inflation data last week, Lavorgna was not persuaded. Economists had been predicting tariffs would show up in numbers month after month, but the data in aggregate has remained muted, he said.

“Almost every economist has gotten it wrong,” Lavorgna told me, and added that he and his colleagues in the administration felt that mainstream economists’ analyses had been clouded by political bias.

At any rate, he said, inflation is a perpetual rise in prices, rather than a one-time increase in price levels. “To the extent there is a negative effect -- which we have yet to see -- it would be a one-off price level adjustment,” he said.

Lavorgna’s comments underscore how a debate over inflation is once again turning on the question of whether any price rise from Trump's tariffs would be fleeting or not. It's an echo of what happened after the COVID-19 pandemic, when the Fed thought inflation was transitory – and it turned out not to be.

Now, while some administration officials and Fed governors expect any impact from tariffs to be temporary, other economists and market participants remain convinced that the president’s conventional wisdom-defying policy could lead to bad outcomes, like slower growth and inflation.

These people want to see more data as they argue that there are still many unknowns around inflation – it could rise in the coming months as much uncertainty remains around what the final tariffs would be; price increases could spill to other areas; and tariffs could cause inflation expectations to rise. There are also many unknowns about the eventual impact of the import duties – and other administration policies like those on immigration – on the economy.

“Even if you think of this as a one-time increase in costs, what is more likely to happen is that firms are not going to pass it on all at once,” said Alberto Cavallo, a Harvard University professor who has built a model to track the price impact of tariffs. “They're going to do it gradually. And that gradualness tends to push inflation upward for a significant amount of time.”

My colleagues at Reuters have developed a tracker to see how companies are responding to tariffs.

What happens with inflation is of immense importance all around -- to global markets, investors and consumers, who endured hardship as easy monetary policies and supply chain disruptions following the COVID-19 pandemic led to inflation levels not seen in more than a generation. Unhappiness with high prices was as one of the reasons behind Trump winning the presidential elections.

Trump has directed his ire over the disagreement on rates most intensely against Jay Powell, the Federal Reserve chair, leading some investors to worry about the independence of the central bank.

With Trump calling for the central bank to cut rates by as much as 3 percentage points while the economy is still holding up, the risk, some economists and investors say, is that such a stimulus would bring a repeat of what happened after the pandemic.

“It makes sense for the Federal Reserve to wait and see before they make a big decision,” Cavallo said.

CONTRADICTORY FINDINGS

Cavallo’s research, which is updated frequently to account for the changes in Trump’s tariff levels, analyzes pricing on the websites of four large U.S. retailers. As of July 14, the analysis found “rapid pricing responses, though their magnitude remains modest relative to the announced tariff rates and varies by country of origin.”

The findings echo other attempts to unpack what’s happening behind aggregate inflation numbers. A paper in May by Fed economists dug inside a closely watched inflation gauge called PCE. It showed tariffs on Chinese imports in February and March had already affected consumer prices.

Chart shows how prices of imported and domestic goods at four major U.S. retailers changed as tariffs were put in place.

The administration, too, has done its own analyses and published a counterview to these findings earlier this month. Using techniques similar to the Fed paper, the Council of Economic Advisers, the White House’s think-tank, found that prices of imported goods had fallen this year.

None of the papers provide a comprehensive view of what’s happening, however, and acknowledge various limitations of their findings.

The debate over the effect of tariffs is also starting to divide Fed officials. Fed Governor Chris Waller, who is seen as a potential candidate to succeed Powell, for example, favors a rate cut at the July meeting because he feels the tariffs are likely to have a limited impact on inflation, and he is concerned the economy and private sector hiring are starting to slow. Others, like New York Fed President John Williams, have professed caution, saying it was still early days.

"Comments coming from Fed officials suggest that the FOMC is cleaving," Thierry Wizman, Global FX & Rates strategist at Macquarie Group, wrote in a note on Friday, referring to the central bank panel that sets monetary policy. Should it persist, it could "evolve into a split along political lines, with one side swayed by political motives, and the need to accommodate fiscal policy, at the expense of adherence to the price stability mandate."

"This would contribute to U.S. yield-curve steepening," Wizman wrote.

Source: Reuters

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Adam

Economic

The European Union appears to be considering whether to deploy its “Anti-Coercion Instrument” — characterized as a “nuclear option” to try to deter trade disputes — as the threat of a 30% tariff on EU imports looms large.

A number of EU member states, including France and Germany, are reportedly considering using “anti-coercion” measures targeting the U.S. if the bloc cannot reach a trade deal with U.S. President Donald Trump, EU diplomats told Reuters this week.

The measures could see the EU restrict U.S. suppliers’ access to the EU market, excluding them from participation in public tenders in the bloc, as well as putting export and import restrictions on goods and services, and limits on foreign direct investment in the region.

The time to deploy what’s been seen as the EU’s “trade bazooka” could be approaching too, as Trump’s trade dispute with the bloc comes to a head.

As things stand, the White House says it will impose a 30% tariff on EU imports to the U.S. on Aug.1 if no trade deal is reached before then. It has said the deadline is fixed but noted that trade negotiations could continue after that date.

What is the ACI?

Relations between the U.S. and EU are at a low ebb after Trump has repeatedly accused the EU of unfair trading practices because it has run a persistent trade surplus when it comes to the exchange of goods.

European Council data shows total trade between the EU and U.S. amounted to 1.68 trillion euros ($1.97 trillion) in 2024 but while the EU ran a trade surplus in goods, it recorded a deficit in services with the U.S. When both goods and services were taken into account, the bloc had a surplus of around 50 billion euros last year.

As Trump’s latest 30% tariff threat looms, the EU has been considering its options, including counter-tariffs targeting U.S. imports, as well as its potentially formidable Anti-Coercion Instrument (ACI), which was created in 2023 but has never been used by the EU before.

The ACI is designed to be a deterrent against any perceived “economic coercion” from third-party countries seen to be enacting “coercive” practices designed to change EU policy, and which could harm trade and investment in the bloc.

The primary objective of the ACI is “deterrence,” the European Commission states, but “if a third country resorts to coercion,” the instrument enables the bloc to respond, “where possible through dialogue and engagement, but also – as necessary – through response measures.”

Those responses — whose aim is “always to induce the cessation of the coercion” can go beyond retaliatory counter-tariffs, with the instrument also allowing for import and export restrictions on goods and services, but also on intellectual property rights and foreign direct investment.

Additionally, the anti-coercion measures allow the EU to impose various restrictions on access to the EU market, notably to public procurement, as well as the ability of U.S. suppliers to sell food and chemicals in the bloc.

Use of the instrument could also lead to measures affecting services in which the U.S. has a trade surplus with the EU, according to Reuters, including those from digital services providers Amazon, Microsoft, Netflix or Uber.

The European Commission notes that the EU’s response measures must be “proportionate to the harm they counter, and must be targeted and temporary,” applying as long as the perceived coercion prevails.

It would also take time for the Commission to act, with the process requiring it to investigate possible cases of coercion before asking member states to confirm its findings. Then, a qualified majority (at least 15 of its 27 states) would be required to be in favor of adopting ACI response measures and even before they were put into action, the Commission would hold talks with the perceived offender to try to resolve the dispute.

CNBC has requested further comment from the European Commission and is awaiting a response.

Trade bazooka ‘a last resort’

Last-minute talks to reach a trade deal with the U.S. are taking place, with the EU targeting a 10% baseline tariff deal and the shielding of key industries, such as autos, agriculture, machinery and aerospace.

“While the EU will stomach a 10% baseline tariff with exemptions and quotas that shield major EU industries, a reciprocal rate that is greater than 15% will likely result in some EU retaliation,” analysts at Eurasia Group said in a note.

“Trump’s threat to triple the rate IS seen as a negotiating tactic and not the landing zone by the EU. That said, the EU will threaten to hit as much as 116 billion euros’ worth of U.S. exports with counter-tariffs and utilize additional trade measures — including the bloc’s potent Anti-Coercion Instrument (ACI) that could target U.S. service exports — to incentivize the Trump administration toward a deal.”

Using the ACI would be something of a “trade bazooka,” Eurasia Group’s Mujtaba Rahman, Emre Peker and Clayton Allen noted, and a last resort.

“While France, Spain, and some other EU members will advocate for a strong retaliation against Trump’s tariffs, the [European] commission is likely to initially focus on hitting U.S. goods with more tariffs,” they said.

An escalatory spiral that leads towards Eurasia’s 10% ‘trade war’ scenario, however, would prompt Brussels to deploy escalatory measures, such as “export controls/duties, public procurement curbs, and/or penalties on U.S. services exports” by using the ACI “trade bazooka as a last resort,” they concluded.

Source: cnbc

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Devin

Central Bank

President Donald Trump criticized Federal Reserve Chair Jerome Powell during a White House news conference on Tuesday, claiming Powell has kept interest rates too high and will be leaving his position in eight months.

"I think he’s done a bad job, but he’s going to be out pretty soon anyway. In eight months, he’ll be out," Trump said during a meeting with Philippine President Ferdinand Marcos Jr.

Trump referred to Powell as "too late" and suggested the Fed chair may be keeping rates elevated for political reasons. He pointed out that Europe has lowered rates multiple times while the U.S. has not, making it difficult for Americans to purchase homes.

"People aren’t able to buy a house because this guy is a numbskull. He keeps the rates too high and probably doing it for political reasons," Trump stated.

The president also criticized a Federal Reserve building project, claiming it has a $900 million cost overrun with a total price tag of $2.7 billion. Trump questioned the need for the building, suggesting it was "another Biden deal."

Trump argued that U.S. interest rates should be at 1% instead of the current level around 4%, claiming this difference costs the country over $1 trillion in interest payments.

Treasury Secretary Scott Bessent, who was present at the news conference, said he had called for the Federal Reserve to conduct "a big internal investigation" into what he described as "mission creep" at the central bank, particularly regarding its spending practices.

Source: Yahoo Finance

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Adam

Economic

U.S. President Donald Trump’s tariffs on European car imports were always expected to hit hard — but a recent flurry of trading updates and corporate earnings from the region’s top automakers can now showcase the impact.

Seeking to protect and strengthen the U.S. automotive sector, Trump imposed 25% tariffs on foreign-made vehicles and car parts in early April.

The automotive sector is widely regarded as acutely vulnerable to levies, particularly given the high globalization of supply chains and the heavy reliance on manufacturing operations across North America.

The U.S. president also raised tariffs on steel and aluminum imports to 50% for most countries. Steel and aluminum are essential materials for durable goods like cars and refrigerators.

Trump recently threatened to raise duties on EU auto imports to 30% from Aug. 1, ramping up the pressure on the 27-nation trading bloc. The European Commission, the EU’s executive arm, has since been considering its response.

In a surprise update on Monday, Jeep maker Stellantis

said that Trump’s tariffs had cost the company hundreds of millions of dollars.

The multinational conglomerate, which owns household names including Jeep, Dodge, Fiat, Chrysler and Peugeot, said it expects to have suffered an initial hit of around 300 million euros ($351.1 million) due to net tariffs incurred over the first half of the year.

Stellantis Chief Financial Officer Doug Ostermann also said that the full-year impact of U.S. tariffs could climb to 1-1.5 billion euros, according to Reuters. The company’s financial results for the first six months of 2025 will be released on July 29.

Sweden’s Volvo Cars, which is seen as one of the most exposed European carmakers to U.S. tariffs, recently reported a sharp year-on-year decline in second-quarter operating profit.

The company said last week that second-quarter operating profit excluding items affecting comparability fell to 2.9 billion Swedish kronor ($302.3 million), down from 8 billion during the same time last year.

In response to Trump’s tariffs, Volvo Cars CEO Håkan Samuelsson told CNBC’s “Europe Early Edition” on Thursday that the company intends to add its best-selling XC60 sports utility vehicle to the production line of its car plant in South Carolina.

Elsewhere, French carmaker Renault on Wednesday lowered its 2025 guidance and announced the appointment of Duncan Minto as interim chief executive officer.

Renault has fared better than many of its European peers in recent months, with a flurry of new launches boosting sales in key markets.

The automaker, which is not directly present in the U.S. market, has previously been singled out as a company that is relatively insulated from the trade disruption caused by Trump’s tariffs.

Even so, Renault has still faced pressure from muted European demand and rising competition from Chinese car manufacturers.

Several European car giants are still to report corporate results. Among them, Germany’s Volkswagen, Europe’s top carmaker, is scheduled to report half-year results on Friday.

Source: cnbc

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Adam

Bond

Economic

The potential ouster of Federal Reserve Chair Jerome Powell by President Donald Trump would drive the 30-year Treasury yield higher by more than half a percentage point, according to Deutsche Bank AG strategists.

The clearest hedge against risks to the Fed’s independence — and a scenario in which US government spending consumes monetary policy — are yield curve steepener trades, a team including Matthew Raskin and Steven Zeng wrote in a note to clients. These trades benefit if the gap widens between short-term and long-term yields.

Currently, the gap between the five and 30-year yields is around 100 basis points — the steepest since 2021. On Tuesday at 8:30 a.m. New York time, the rate hovered around 4.94%.

“Powell’s dismissal would be meant to produce easier monetary policy and should lift inflation expectations and risk premia,” they wrote. “The implied moves are big but plausible.”

Attacks on the Fed chair by the president and his allies in the administration, who wish to see the central bank lower interest rates faster than officials are currently projecting, have taken on fresh urgency in recent weeks.

On July 16, when headlines flashed across the wire that Trump was likely to fire Powell — a claim that Trump denied within an hour — US equities, the dollar and long-term US government bonds retreated sharply while short-term Treasuries rallied.

What Bloomberg strategists say...

“If it wasn’t for inflationary impact of tariffs, Powell would likely have already been happy to cut rates. But the economy is set to be visibly slowing enough in the next few months such that, no matter who is Chair at that stage, they will be able to please the President, without being seen to appease him.”

— Simon White, Markets Live Strategist. Click here for the full analysis.

Based on the gyrations in Treasuries across the curve seen during that brief time period last week, the 30-year nominal Treasury yield could surge some 56 basis points, the Deutsche Bank strategists wrote — even as the front-end of the Treasury curve rallies on expectations of easier monetary policy in the short-term.

The 30-year Treasury has tumbled in July as investors mull over US inflation, the government spending outlook and the path for Fed interest-rate cuts. Last week’s consumer inflation figures sparked a selloff that pushed the 30-year yield above 5% for the first time since June.

“Market participants seem to agree that the risk to Fed independence is rising,” wrote Jan Hatzius, chief economist at Goldman Sachs Group Inc., noting that a forward gauge of inflation has decoupled higher from the two-year risk-free rate following a long period of alignment. “A further increase could make Fed officials more reluctant to cut,” he said.

Still, Goldman expects the first of three consecutive rate cuts of 25 basis points to come at the Fed’s September meeting, Hatzius wrote. Interest-rate swaps show a 56% chance of a reduction at that meeting.

Source: Bloomberg

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Daniel Carter

Central Bank

Economic

Cryptocurrency

Key Points:

● President Trump calls for Federal Reserve interest rate cuts, impacting market sentiments.

● Reportedly, Federal Reserve likely to maintain current interest rates.

● Bitcoin and Ethereum exhibit macro sensitivity; new rate policies may influence asset performance.

Donald Trump expressed intentions for Federal Reserve policy changes on July 22, emphasizing the need for reduced interest rates in the U.S. economy.

This development raises questions about Jerome Powell's future, with outlines of potential economic strategy shifts impacting market sentiments.

Trump Advocates 3% Rate Cut to Stimulate Growth

Over recent weeks, U.S. President Donald Trump has repeatedly requested the Federal Reserve and its Chairman Jerome Powell to lower interest rates by 3 percentage points. Pressure from high–level government leaders highlights the administration's stance on stimulating economic growth despite no current plans for replacing Powell. Trump's persistent focus on monetary policy aims at alleviating refinancing costs and spurring overall market optimism. The special target outlined was maintaining interest rates at 1%, yet the latest figures indicate a near 95% probability the Fed will keep current rates unchanged.

"The Federal Reserve's interest rates are at least 3 percentage points too high.... Lower the interest rates!" Donald Trump said.

Market reactions have been notable, albeit anticipatory, rather than responsive. Bitcoin and Ethereum, among other risk-sensitive assets, show heightened sensitivity to U.S. macro-policy shifts tracked continuously by analysts. Stock indices have depicted upward movements, underscoring a positive risk sentiment potentially stemming from speculation as financial agendas drive investment strategies. Notably, Trump's direct engagement on such financial matters through public statements underscores a broader narrative seeking alignment with market–friendly policies.

Bitcoin's Market Dominance Amid Fiscal Policy Shifts

Did you know? Historically, U.S. fiscal policy shifts frequently influence Bitcoin price movements, with previous rate cut speculations aligning with significant market rallies in 2019-2020. Understanding these patterns aids in anticipating potential crypto market directions.

Bitcoin's latest trading status, as captured on July 22, 2025, features key data. Bitcoin (BTC) is currently valued at $119,030.52 with a market cap of 2.37 trillion dollars. The asset's market dominance stands at 60.19%, reflecting its significant influence on the crypto market. Notable price changes over recent periods include a 24-hour gain of 0.47% and a 90-day increase of 28.51%. The 24-hour trading volume is recorded at 77.57 billion dollars, an indicator of trade activity amid broader monetary and policy assessments.

Bitcoin(BTC), daily chart, screenshot on CoinMarketCap at 15:48 UTC on July 22, 2025.

Insights from the relevant research team suggest continued scrutiny over rate policies by U.S. authorities and investors. Macro-economic trends show cryptocurrencies are keenly affected by global rate shifts. Historically low interest rates have spurred high-risk asset growth, reinforcing the need for nuanced analysis by investors. Confidence in regulatory environments and policy expectations will fundamentally calibrate cryptocurrency trajectories and broader financial market health.

Source: CryptoSlate

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Adam

Economic

Central Bank

Treasury Secretary Scott Bessent is taking aim at both the Federal Reserve and the rules the Fed enforces as a supervisor of big banks, but made it clear he doesn't think Fed Chair Jerome Powell needs to step down immediately.

His boss, President Trump, has been calling repeatedly for Powell's resignation.

“There’s nothing that tells me that he should step down right now,” Bessent said on Fox Business Tuesday. "His term ends in May. If he wants to see that through, I think he should. If he wants to leave early, I think he should.”

Yet the Treasury secretary still turned up the pressure on Powell and the Fed with a post Monday on X stating that there should be a review of the central bank’s $2.5 billion renovation of its headquarters and a review of its non-monetary policy operations.

He argued that “significant mission creep and institutional growth have taken the Fed into areas that potentially jeopardize the independence of its core monetary policy mission.”

He posted the comments on the same day he spoke at the opening of a Fed conference designed to review the capital framework governing big banks. That conference continues Tuesday with opening remarks from Powell.

At the conference, Bessent made a separate call for “deeper reforms” of the regulations governing the nation’s biggest banks, arguing that “outdated capital requirements” impose “unnecessary burdens on financial institutions.”

Specifically, he suggested that regulators scrap a dual capital structure proposed during the last administration but never enacted, calling it “flawed.”

"We need deeper reforms rooted in a long-term blueprint for innovation, financial stability, and resilient growth," Bessent said in his remarks.

Bessent is among the candidates being considered to replace Powell as chair of the central bank once Powell’s term expires in 10 months.

Trump and other White House officials have been hammering Powell and the Fed over the slow pace of interest rate cuts, with none being made so far in 2025, as well as the costs involved in the Fed’s $2.5 billion renovation of its headquarters complex along the National Mall in Washington.

Bessent joined that chorus on Monday.

“While I have no knowledge or opinion on the legal basis for the massive building renovations being undertaken on Constitution Avenue, a review of the decision to undertake such a project by an institution reporting operating losses of more than $100 billion per year should be conducted,” Bessent said in his Monday post on X.

Trump has considered firing Powell and Bessent has urged the president not to do so, according to The Wall Street Journal. Powell has said repeatedly that he intends to serve out his term as chair and that his removal is not permitted by law.

Bessent in his Monday comments on X did express support for the Fed’s independence on the subject of monetary policy, saying that autonomy is “a jewel box that should be walled off” and that the Fed’s independence “is a cornerstone of continued US economic growth and stability.”

But the White House has also made it known that it wants greater control over the Fed’s operations outside monetary policy, including the supervision of the nation’s biggest banks.

Bessent, earlier this year, said he would be coordinating a broad reexamination of financial regulation, with an eye toward making it easier for banks to lend as a way of boosting the US economy. And he said again Monday that the Treasury would play a central role.

"The department will break through policy inertia, settle turf battles, drive consensus, and motivate action to ensure no single regulator holds up reform," Bessent said of the Treasury.

"We need deeper reforms rooted in a long-term blueprint for innovation, financial stability, and resilient growth."

US regulators have already proposed one of the most dramatic rollbacks of bank capital rules since the 2008 financial crisis, saying last month they wanted to alter the so-called enhanced supplementary leverage ratio (eSLR).

Banks have complained that this ratio penalizes them for holding lower-risk assets such as Treasury bonds.

Doing away with it "should simplify bank capital management" and "that will bring down costs and help banks more effectively manage their capital levels," TD Securities analyst Jaret Seiberg said in a Tuesday morning research note.

Even with the proposed curtailing of this leverage ratio, large banks would still be bound by their risk-weighted capital constraints, Seiberg said.

"This is not going to produce material capital relief for banks," Seiberg added.

More regulatory changes for big banks could still be on the way.

Michelle Bowman, the Fed's top banking regulator appointed by Trump, said in a speech last month that revisiting the eSLR requirement is just the start of broader capital rollback considerations.

"More work on capital requirements remains, especially to consider how they have evolved and whether changes in market conditions have revealed issues that should be addressed," she said.