Fed Chair Jerome Powell may have locked in a September rate cut last week, but some market veterans say he's focused on the wrong threat entirely.
Former hedge fund manager Danny Dayan argues the Fed is underestimating persistent service inflation and the inflationary shock still looming from Trump’s tariffs.
“Powell’s error is immense and broad,” Dayan wrote on Friday.
He took aim at Powell’s renewed emphasis on jobs, saying unemployment can be “easily and quickly resolved.” On the other hand, inflation quietly erodes living standards, especially for lower-income Americans.
Dayan warned that service-sector inflation remains dangerously high, citing fresh PMI data showing services as the leading driver of price increases.
He also criticized Powell for dismissing inflation as “transitory,” even as tariffs threaten to permanently impair the supply side of the economy.
“It’s a permanent destruction of the supply side and potential growth — and thus not transitory,” Dayan said.
Inflation still embedded in the system
He’s not alone in that view. Economist Peter Schiff chimed in with Dayan’s warning, arguing that the Fed should be hiking rates, not cutting.
And according to Charlie Bilello, chief market strategist at Creative Planning, prices are still 11% above pre-Covid levels. He argues rates should stay elevated until that “excess” inflation is fully wrung out of the system.
Another “underappreciated” factor is tariffs. Many economists warn that Trump’s trade policy will lift costs for businesses and exporters and those costs will eventually hit consumers.
Early signs are already showing. The July Producer Price Index (PPI) rose 0.9% month-over-month, the biggest jump since June 2022, when consumer inflation last peaked.
Services rose 1.1%, the largest gain since March 2022, backing Dayan’s very concern that services remain sticky.
“We expect a stronger pass-through of levies into consumer prices in the coming months,” wrote Nationwide senior economist Ben Ayers, who sees higher inflation in late 2025.
That’s in line with Goldman Sachs research, which found that U.S. companies have so far absorbed about 64% of Trump’s tariff costs, a cushion expected to shrink in the second half.
Powell may be pivoting to labor market concerns, but critics say inflation hasn’t been tamed. It’s just morphing. With service-sector prices still rising and tariff shocks only starting to flow through, Dayan warns the Fed is once again behind the curve.
“Inflation will resurface in many forms over the next year,” he said. And if the Fed cuts too soon, it may not be ready for what comes next.
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