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Investing.com -- The Federal Reserve and financial markets are anticipating that the inflationary impact of the tariffs imposed during Trump’s administration will be short-lived. However, deVere Group, one of the world’s largest independent financial advisory and asset management organizations, expresses skepticism.
Nigel Green, CEO and Founder of deVere Group, shared his analysis following the Fed’s decision on Wednesday to maintain interest rates between 4.25% and 4.5%. Fed Chair Jerome Powell expressed expectations of a temporary inflation increase, still projecting two rate cuts in 2025. This announcement was met with a positive response from the markets.
Despite acknowledging the potential for higher inflation and lower economic growth, Fed officials seem to underestimate the risks, according to Green. He pointed out that Powell’s assumption that tariffs would only result in a temporary price increase, dismissing the possibility of long-term inflation, might be flawed.
Green referenced historical data to highlight that reversing inflation can be challenging. He explained that when costs rise, businesses and workers adjust their expectations accordingly. Tariffs increase import prices, compelling companies to transfer these higher costs to consumers. Subsequently, workers demand increased wages to keep up with the cost of living.
Green described this as a well-established economic reality, stating that wage inflation is often persistent and contributes to broader price pressures that the Fed may struggle to manage.
The deVere Group CEO also pointed out that the Trump administration’s policy of reducing the workforce adds to inflationary pressures. With a smaller labor pool, employers are compelled to raise wages to attract and retain talent, contradicting the Fed’s belief in a temporary inflationary effect.
Green also noted that the Fed’s argument overlooks secondary effects. Protectionist trade policies encourage companies to relocate production to the U.S., which may increase labor costs and fuel wage growth.
Despite Powell’s reassurances that the inflationary effect of tariffs would be short-lived, Green expressed concern that this optimism may be misplaced. He warned that if inflation remains at high levels, the Fed’s anticipated rate cuts could disappear, potentially leading to the necessity of maintaining higher rates for longer and causing significant market volatility.
While market optimism remains strong, Green suggests that investors should be prepared for a longer period of elevated inflation based on historical and economic indicators.
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