St. Louis Fed President Alberto Musalem cautioned that even with the 90-day trade truce between the US and China, the current level of tariffs could still have “significant” short-term effects on the economy.
In a speech overnight, he warned that tariffs are likely to “dampen economic activity” and further weaken the labor market. At the same time, tariffs could raise inflation both directly, through higher import prices, and indirectly, by triggering broader cost increases in domestic goods and services.
Musalem outlined two potential monetary policy responses depending on how persistent the inflationary effects of tariffs prove to be.
If the price impacts are temporary and inflation remains controlled, then it may be appropriate for the Fed to “look through” the short-term inflation spike and consider easing policy to cushion the labor market.
However, if inflation proves stickier and starts to unanchor long-term expectations, Musalem argued that restoring price stability should take precedence, even at the cost of weaker growth and higher unemployment.
“History tells us that restoring price stability is more costly for the public… if inflation expectations are not well anchored,” Musalem said.
UK PMI composite ticks up to 49.4, price pressures ease from April spike
UK PMI Services rose modestly from 49.0 to 50.2, while Manufacturing PMI edged lower from 45.4 to 45.1. As a result, the Composite PMI ticked up from 48.5 to 49.4, still below the 50-mark that separates expansion from contraction.
According to S&P Global’s Chris Williamson, business confidence has improved since April, helped in part by easing trade tensions. However, output across the private sector shrank for a second consecutive month, suggesting that the UK economy may be slipping into contraction for Q2.
On a more encouraging note, inflationary pressures appear to have cooled significantly from April’s spike. This moderation in price growth, combined with lackluster output and emerging job losses, strengthens the case for further monetary easing by BoE in the coming months.
Full UK PMI flash release here.