Trump’s Tariffs ‘Highly Likely’ to Spark Inflation, Fed Chief Warns

Jerome Powell (Reuters)
Reuters
By Yuval Rosenberg and Michael Rainey

Good evening. Federal Reserve Chair Jerome Powell issued a stark warning today about President Donald Trump's economic plan. We've got details.

Fed Chief Warns Trump's Tariffs 'Highly Likely' to Spark Inflation

President Donald Trump's tariff war could make it more difficult for the nation's central bank to keep the lid on inflation, Federal Reserve Chair Jerome Powell said Wednesday.

In a speech at the Economic Club of Chicago, Powell said the central bank is waiting to see how the economy responds to Trump's tariff regime, which is still developing and could take a variety of paths and produce a range of outcomes. But Powell left little doubt that the Fed sees the tariffs as unavoidably inflationary, even if the duration and size of the price-level disruption are unknown.

"Tariffs are highly likely to generate at least a temporary rise in inflation," Powell said. "The inflationary effects could also be more persistent."

Powell added that the Trump tariffs so far have been "significantly larger than anticipated," which suggests that the economic effects will likely be larger, too.

The stagflation challenge: An increase in inflation would be particularly difficult to respond to if it is accompanied by a rise in unemployment - the stagflationary environment that many economists fear the tariffs could produce.

"We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension," Powell said, referring to the Fed's two central goals of price stability and maximum employment. "If that were to occur, we would consider how far the economy is from each goal, and the potentially different time horizons over which those respective gaps would be anticipated to close."

Underlining the potential difficulty of seeking to rein in price increases while also supporting employment, Powell noted that interest rate policy has contradictory effects on those key variables. "Our tool only does one of those things at a time," he said.

In the meantime, the Fed will wait and watch to see what happens before making any policy changes. "For the time being, we are well-positioned to wait for greater clarity before considering any adjustments to our policy stance," he said.

Powell's tariff-related comments were not welcome news on Wall Street. The S&P 500 ended the day 2.2% lower and the Dow Jones Industrial Average fell nearly 700 points, or 1.7%.

A note on the deficit: Powell briefly touched upon the U.S. fiscal situation, as well. "We're running very large deficits at full employment, and this is a situation that we very much need to address," Powell said.

At the same time, Powell noted that discretionary spending in the budget is not a major part of the problem - even if it is the main focus of congressional cost-cutting at the moment.

"All of this domestic discretionary spending, which is essentially where 100% of the conversation is, is small as a percentage of federal spending and is declining," Powell said. "When people are focusing on cutting domestic spending, they're not actually working on the problem."

U.S. debt is not yet unsustainable, Powell said, but the U.S. fiscal path is. To make progress, lawmakers need to consider the driving forces behind the rising deficit: ongoing imbalances between revenues and spending in major programs, including Medicare, Medicaid and Social Security, as well as interest on the debt.

"Those are issues that can only be touched on a bipartisan basis," Powell said. "Neither party can figure out what to do without both parties being at the table. So that's critical."

New 'Reciprocal' Tariffs Have Generated $500 Million So Far, CBP Says

U.S. Customs and Border Protection said this week that it is collecting about $250 million per day from tariffs - far short of the $2 billion President Donald Trump has claimed. CBP collects tariffs directly from U.S. importers at points of entry.

Since taking office, Trump has taken 15 actions related to trade, CBP told CNBC on Monday. Taken together, those policies have generated about $21 billion since January.

The latest round of "reciprocal" tariffs, which Trump began to roll out on April 2, have produced about $500 million since April 5, CBP said.

Trump Signs Order Aimed at Lowering Drug Costs, Including a Change Sought by Big Pharma

President Donald Trump signed an executive order yesterday meant to lower prescription drug prices and "improve" some Biden-era policies, including a change backed by the pharmaceutical industry to the way Medicare negotiates some prices.

Trump's order calls for administration officials to looks for ways to make Medicare's price negotiations more transparent, minimize negative effects on innovation, lower Medicare Part D premiums, examine the role of industry middlemen, increase foreign drug imports, accelerate the approval process for generics, make prescription drugs more easily available over-the-counter, and make insulin and injectable epinephrine more affordable for low-income Americans or those without insurance.

The order also directs the Department of Health and Human Services to work with Congress to delay Medicare price negotiations for so-called "small molecule" drugs, which are often oils or tablets. The law as it stands now allows those drugs to be chosen for price negotiations four years earlier than a different class of drugs called biologics. The pharmaceutical industry has decried that "pill penalty" and said that the policy pushes drug companies to stop developing these medicines even if they are less expensive and more effective and convenient.

Trump's order directs HHS to align the timeline for negotiation for both groups of drugs, though it doesn't spell out the details. The change would end what the order calls a "distortion that undermines relative investment in small molecule prescription drugs." Delaying the eligibility of small molecule drugs means they could be on the market for 11 years before becoming eligible for price negotiations and 13 years before any negotiated prices take effect.

In a new analysis of Trump's order, policy analysts Juliette Cubanski and Tricia Neuman of KFF, a nonpartisan healthcare foundation, write that the change "could lead to higher Medicare prescription drug spending, higher prices, and potentially higher Medicare Part D premiums."

The KFF report notes that 13 out of the 25 drugs that were previously selected for Medicare price negotiations, including some of the costliest medications, would not have been eligible if Trump's four-year delay was in place when they were chosen: "For example, Eliquis and Jardiance, 2 of the top 3 drugs based on total gross Medicare Part D spending selected in the first round, would have been ineligible that year based on their FDA approval dates. Similarly, 2 of the top 3 drugs selected in the second round, Ozempic/Rybelsus/Wegovy (semaglutide) and Trelegy Ellipta, would have been ineligible for selection based on their approval dates."

The 13 drugs that would have been ineligible under Trump's delay accounted for $61 billion in gross Medicare Part D spending, or about two-thirds of the $91 billion in total spending on the drugs chosen for price negotiations. If those drugs weren't eligible to be picked, Medicare would have had to turn to other drugs representing lower spending - meaning that Medicare savings would be reduced.

Steve Knievel, a drug-pricing advocate at the nonprofit advocacy group Public Citizen, praised elements of Trump's order as "laudable" in comments to The Washington Post, but he also criticized the delay on price negotiations. "It strains credulity that they are serious when they say they want to negotiate deeper discounts - when in the same breath they are indicating they want to delay drug price negotiation," Knievel told the Post.

Trump Picks Hunter Biden Whistleblower as Acting IRS Commissioner

President Trump has tapped Gary Shapley, the whistleblower who publicly criticized the handling of the Hunter Biden tax investigation, as the Internal Revenue Service's acting commissioner.

Shapley joined the IRS in 2009. He gained national attention when, as an IRS supervisory special agent, he came forward in 2023 with allegations of political interference in a probe into then-President Joe Biden's son. Other officials disputed some of Shapley's claims. Hunter Biden ultimately pled guilty to charges that he failed to pay $1.4 million in taxes. He was later pardoned by his father.

At the IRS, Shapley claimed he was retaliated against for cooperating with the Biden probe. Last month, he was promoted to Deputy Chief of IRS Criminal Investigations. Now, he is the IRS's fourth leader in as many months as the agency deals with deep cuts and other changes pushed by the Trump administration. The agency is in the process of shedding about a third of its workforce through resignations and layoffs. It had 102,000 employees in January and is expected to reduce that number to about 70,000.

Those cuts are expected to result in lower revenue collections. "I worry that this Administration's destructive initiatives at IRS will cost the federal government hundreds of billions of dollars in revenue while putting taxpayer services and privacy at risk as critical employees are either laid off or see no alternative but to resign their posts," Chye-Ching Huang, executive director of New York University's Tax Law Center, said in a statement.

Shapley replaces Melanie Krause, who said she would leave the agency after it agreed to share immigrants' tax data with immigration officials.

"Gary is a long-tenured civil servant who has dedicated the last 15 years of his professional life to the IRS," a Treasury spokesperson said in an email to the Associated Press. "Gary has proven his honesty and devotion to enforcing the law without fear or favor, even at great cost to his own career. He'll be a great asset to the IRS as we rethink and reform this crucial organization."

The Senate has yet to hold a confirmation hearing for Trump's choice to lead the agency on a permanent basis, former Missouri Rep. Billy Long.

Investigative news site The Lever, founded by former Bernie Sanders speechwriter David Sirota, reported Tuesday that Long had $130,000 in personal debt paid off by donors at firms with business before the IRS.

Quote of the Day: Deconstructing the State

"The IRS is under what can only be described as a deliberate effort to dismantle state capacity. Core tasks are being neglected. Less money will be collected, increasing deficits and putting pressure on spending for critical programs. The very rich, in particular, will benefit. Not only are they being handed an extension of Trump era tax cuts; they are also seeing a tax reporting environment where the IRS will simply be unable to keep up. The agency is experiencing a massive leadership vacuum and is being converted into a tool of mass deportation. IRS has never been in worse shape."

  • Don Moynihan, who teaches at the Ford School of Public Policy at the University of Michigan, writing on his Substack blog on Tax Day about the Trump administration's effort to weaken the IRS.

Moynihan notes that cutting funding at the IRS is counterproductive in a very direct way. "Every dollar spent on the IRS generates somewhere between $5-12 in return, and every hour spent auditing the very wealthy generates $13,000," he writes. "One tax official working on tax fraud said that their team of less than 10 people had generated $5 billion in revenue in four years."

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