Federal Reserve Chairman Jerome Powell, testifying before the Senate on Tuesday, said "policy restraint for longer" is likely, if the labor market remains solid yet inflation doesn't keep falling toward 2%. The S&P 500 is slightly lower ahead of Wednesday's consumer price index, following the latest escalation of Trump tariffs.

An extended pause is looking more likely as President Trump fires off a barrage of new or expanded tariffs, including those announced Monday on steel and aluminum that lifted Nucor (NUE) and Steel Dynamics (STLD).  Trump tariffs have essentially supplanted the CPI as the big economic news of the week. Although core inflation could take a turn for the better in January data, economists expect that progress to be reversed by Trump tariffs in coming months.

Federal Reserve Chair Powell Testimony

Powell's opening statement to the Senate in his semiannual monetary policy testimony highlighted the "uncertainties" the Fed faces as Trump rolls out an ambitious agenda of tax cuts, tariffs, deregulation and deportations. In a Dec. 18 news conference, Powell compared the Fed's job to "driving on a foggy night." He added: "You just slow down."

Powell sees the Fed as being in a good position to do exactly that. With the January jobs report now in hand, Powell said that labor market conditions "remain solid and appear to have stabilized." Powell noted an average of 189,000 monthly job gains over the past four months.

With inflation still "somewhat elevated" and monetary policy "significantly less restrictive than it had been," Powell said the Federal Reserve doesn't "need to be in a hurry" to cut again.

CPI, PPI Preview

The Fed's primary inflation rate, the core PCE price index, gets about 70% of its composition from the CPI and close to 30% from the producer price index. Deutsche Bank economists expect that the core PCE price index for January, which won't be released until Feb. 28, will ease to 2.6% from 2.8%. That's partly because the core PCE price index jumped 0.5% in January 2024, making for an easy year-over-year comparison.

The core CPI rose a more moderate 0.4% in January 2024, which still presents room for improvement in Wednesday's figure. Economists see a 0.3% monthly increase, according to Econoday. That could see the 12-month core CPI inflation rate dip to 3.1% or hold steady at 3.2%.

Thursday's PPI will include some important inputs into the core PCE price index, including its largest component, health care services prices.

Trump Tariff Inflation Impact

As Powell is likely to reiterate in his testimony, the impact of tariffs on inflation is far from certain. It can depend on currency fluctuations, substitution of goods by consumers, and decisions by wholesalers and retailers about how much of a price increase they will pass along.

Deutsche Bank economists led by Justin Weidner wrote in a Monday note that Trump tariffs could push the Federal Reserve's main core inflation rate above 3.5% this year. That includes the impact of the steel and aluminum tariffs, the delayed tariffs on Canada and Mexico and Trump's new plan for "reciprocal" tariffs.

The latter idea is a way for Trump to try and avoid tit-for-tat retaliation. It would have the U.S. match tariffs on goods imports from countries that have tariffs on imports from the U.S. Citing World Bank data, Deutsche Bank figures reciprocal tariffs could boost the average tariff rate on imports by 3.3 percentage points. The reciprocal tariffs, depending on how much was passed to customers, could boost inflation by 0.25 to 0.4 percentage point, they estimate.

The steel and aluminum Trump tariffs might add a bit less than one-tenth of a percentage point to the inflation rate, Deutsche Bank figures, though the impact would be much higher on autos and appliances.

S&P 500

The S&P 500 was up very slightly, less than 0.1%, as the Federal Reserve chairman testified. On Monday, the S&P 500 rose 0.7%, finishing just 0.85% below the Jan. 23 record closing high.

Be sure to read IBD's The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.

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