The Federal Reserve and financial markets are betting that the inflationary impact of Trump’s tariffs will be temporary.
But one of the world’s largest independent financial advisory and asset management organizations is not convinced by this.
The analysis from Nigel Green, CEO and Founder of deVere Group, follows the Fed on Wednesday having kept interest rates steady at 4.25% to 4.5% in its latest policy decision, but what followed was even more telling.
Chair Jerome Powell reiterated the view that while inflation is expected to run hotter, the central bank still foresees two rate cuts in 2025. Markets rallied on the back of this optimism.
“The Fed’s latest projections acknowledge higher inflation and lower economic growth, yet officials continue to downplay the real risks.
“Powell suggested that tariffs would cause a temporary spike in prices, seeming to brush aside concerns that they could entrench long-term inflation. But this assumption is flawed,” says Nigel Green.
“History teaches us that, once embedded, inflation is notoriously difficult to reverse. History shows that businesses and workers alike adjust their expectations when costs rise.
“Tariffs will drive up import prices, forcing companies to pass on higher costs to consumers. And once that cycle begins, workers demand higher wages to keep pace.
“This is a well-established economic reality. Wage inflation rarely unwinds quickly. It becomes sticky, feeding into broader price pressures that the Fed will struggle to control.”
In addition, the Trump administration’s policy of reducing the available workforce only adds to inflationary pressures.
With a tighter labor pool, employers must raise wages to attract and retain talent.
“This directly contradicts the Fed’s belief in a temporary inflationary effect. A workforce squeeze and supply chain disruptions from tariffs will compound one another, creating a perfect storm for sustained price pressures,” notes the deVere Group CEO.
The Fed’s argument hinges on the idea that tariffs will simply create a one-off adjustment in prices rather than an ongoing inflationary cycle. Yet this ignores the secondary effects.
Protectionist trade policies encourage companies to relocate production to the US—a move that, while politically attractive, is far from cost-neutral. Domestic production carries higher labor costs, further fueling wage growth.
“The notion that inflationary pressures will quickly subside under these conditions is wishful thinking at best.”
Markets, it would appear, have bought into Powell’s messaging. Stocks surged as he reassured investors that the inflationary effect of tariffs would be short-lived.
But this optimism seems misplaced.
Nigel Green explains: “If inflation persists at elevated levels, the Fed’s anticipated rate cuts could quickly evaporate.
“The reality is that the US central bank may be forced to keep rates higher for longer, upending market expectations, and potentially triggering significant volatility.”
For now, market optimism is strong.
“But history and economics suggest that investors should be preparing for a longer period of elevated inflation,” he concludes.
deVere Group is one of the world’s largest independent advisors of specialist global financial solutions to international, local mass affluent, and high-net-worth clients. It has a network of offices around the world, more than 80,000 clients, and $14bn under advisement.
