Dom’s Quick Take: Are Fed Policy and Trump Administration Wishes Converging?

Summary

• Actual US tariffs continue falling well below policy announcements, possibly because the Trump administration is quietly lowering them.
• Real wage growth has fallen by half as nominal wage growth is lagging the increase tariffs-induced inflation increase.
• Fed policy and administration wishes could be converging because data supports easier Fed policy, but ultra-loose Fed policy would lift inflation and voter unhappiness.

Market Implications

• I see risk of a 50bp Fed cut this week above but near 50%, against markets pricing 5%.

Is Trump Administration Finished With Tariffs and Fed?

Two recent data points make me wonder how much more change we can expect in the administration’s tariff and Fed personnel policies.

First, is the actual tariff rate, which has remained at 10% since June (Chart 1). Based on policy announcements, the average effective tariff rate is about 17% (Yale’s Budget Lab estimate). So, the administration has made no progress implementing tariffs over the past three months or it has quietly stopped raising tariffs further. Recent data, such as the exemption of pharmaceuticals from tariffs on India, suggests the latter.

Second, is the decrease in real wages growth (Chart 2). During his confirmation hearings, US Treasury Secretary Bessent proclaimed it was ‘Main Street time.’ Wall Street would do ‘well enough’ but it would not be the administration’s focus. However, data shows the opposite. Equity markets are scaling new highs, but real wages growth has been falling. It was 0.8% YoY in August, almost half of April’s 1.5%. The end of mass, low-skill immigration has not kept nominal wage growth ahead of inflation, which tariffs have increased.

This begs the question of what President Trump wants to achieve with his Fed takeover. Much easier policy would likely let inflation loose and, since nominal wages adjust with an inflation lag, lead to lower wages and further worker unhappiness ahead of November 2026 mid-terms (Charts 3-4). Regardless, the Fed is about to ease anyway. This tells me the administration’s maneuvers to bring in Miran and remove Governor Cook could be a distraction and that data matters more than personnel issues for Fed policy. Data also suggests a convergence between Fed policy and administration wishes. The Fed must ease to address rising employment risks, but excessive easing would lift inflation and voter unhappiness.

Market Consequences

I still expect, with low conviction, a 50bp cut at this week’s FOMC. Compared with a year ago when the Fed cut 50bp, downside risks to employment are stronger while inflation risks are higher. However, no sign exists of tariffs-induced broadening price pressures. So far, Chair Powell’s base case scenario of a one-time shift in the price level is playing out. What makes me think 50bp is more likely than 25bp is that once the labour market weakens in earnest and unemployment starts rising, it could so at a brisk pace.

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