I thought the most significant statement in the Minutes was this:
“the effects of potential changes in trade and immigration policy as well as strong consumer demand. Business contacts in a number of Districts had indicated that firms would attempt to pass on to consumers higher input costs arising from potential tariffs. They further noted “upside risks to the inflation outlook.”
It is the more signifcant because of the paper published on Feb 17 by Christopher Waller (Disinflation Progress Uneven but Still on Track Rates Cuts on Track as Well). The paper down-played the influence that tariffs should have on Fed policy. Waller cites two examples from history when the Fed ignored macro exogenous shocks (the invasion of UKraine being one of them). This turned out to be the right thing to do,
My take is this! I would certainly consider other variables than Tariffs and Forced Repatriation when setting monetary policy. For example, r* for the US economy (at 4% in my humble judgement) is close to where we are now. This limits the scope for further Fed interest rate cuts.
But tariffs matter too. There are big differences now to when tairiffs were imposed in President Trump's first period of office. Then they were way lower and affected less products and countries. Sso less of the US consumer and corporate purchase baskets was hit. Inflation expectations were well anchored. And inflation had been at or below the Fed's target for a long time. None of this applies now.
So my guess that when the Trump administration has finished imposing remedial/recipriocal tariffs, which can encompass as many variables as the President feels like (differentials in tariffs, tax, governement aid and exchange rates), PCE inflation will be 100-200 basis points higher with considerable spill overs into expectations.
That will cause Fed policy to reverse (possibly after one more misguided rate cut) and the 30yr Treasury to yield 5.5%.
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