August 2025
In the eight months since Donald Trump was reinstalled as the American President, monetary policy south of the border has been subjected to political interference at an unprecedented level. Most observers are of the opinion that Jerome Powell has performed his duties honourably and that the monetary stance taken has been broadly reflective of overall macro circumstances. Given how relentlessly Trump has berated Powell throughout the year, any move to ease rates could be interpreted as a form of capitulation. Of course, if the economy is weakening and inflation remains benign, a move to lower rates would be entirely justified. Observers need to be careful not to imply political causation when the rationale behind such a decision is properly based on economics.
We’re now into the last few days of August, and a September interest rate decision looms. For months now, I have been warning that the American economy (and by extension, the global economy) may be heading for a bout of stagflation. The current circumstances are delicate, and few people envy the task in front of central bankers around the western world. The challenge is especially acute in the United States, not only because the stakes are highest because of the size of the economy, but also because the objective metrics for the economy continue to flash red. No one wants to make a policy error, but when you’re already walking on a knife edge, even the slightest miscalculation can be devastating.
This may lead to a curious case of cause-and-effect mistiming. It appears the tariffs that have belatedly been imposed by Donald Trump have caused employment numbers to suffer somewhat, while giving importers time to make band-aid adjustments. The delays in implementation have allowed importers to stockpile inventories in anticipation of the tariffs ultimately being imposed in the ensuing months. It is against this backdrop that the central bank needs to weigh its options. There are numerous commentators who believe inflation will manifest once those inventories are drawn down, which seems imminent.
As a result, it is entirely possible that the appropriate monetary stance heading into Q4 is one of either maintaining rates or raising them, in anticipation of inflation that will almost certainly appear with a vengeance before year end. A rate cut in September may only serve to add fuel to an inflationary fire that is merely smoldering at this point.
Most investors are ill-prepared for a stagflationary environment. It has been nearly 50 years since we have been in one, and most investors today have never had any personal experience with an economy that is sputtering while everything costs more. In the end, it will not only be central bankers who feel frustrated and unable to properly respond. Some people will lose their employment. Virtually everyone will end up paying more for both discretionary and core items. Last time around, the Federal Reserve had to resort to draconian actions to achieve its goals.
If inflation due to a confluence generationaly high tariffs and a misread of the monetary response required rears its ugly head, virtually everyone will be impacted. Most people will insist they didn’t see it coming, even though the indications are that such an outcome appears likely. One of the most time-worn adages in personal finance is that people didn’t plan to fail, they simply failed to plan. I believe that September will be the last month available to most people to put plans in place (i.e. to make portfolio adjustments) in anticipation of stagflation. Optimism bias is a threat to everyone’s finances because everyone is susceptible to the blithe viewpoint that the tribulations of past generations will not be repeated. History may not repeat precisely, but I’m seeing several rhymes.