- Federal Reserve Chairman Jerome Powell warned that President Trump’s tariffs, announced on April 2, are likely to cause higher inflation and slower economic growth, creating a potential conflict between the Fed’s goals of price stability and maximum employment.
- Powell noted that the U.S. economy remains “solid” but has slowed in the first quarter of 2025, with bond market volatility expected to persist as markets process the significant tariff increases.
- The Fed is debating whether tariff-driven inflation will be temporary or persistent, with Powell emphasizing a cautious approach, waiting for clearer data before adjusting interest rates.
Federal Reserve Chairman Jerome Powell has signaled a cautious approach to monetary policy amid economic turbulence sparked by President Trump’s tariff policies, emphasizing the potential for higher inflation and slower growth. Speaking at a Chicago event, Powell highlighted the central bank’s dilemma as it balances its dual mandate of price stability and maximum employment, noting that the economy may struggle to align with both goals for the remainder of the year. The announcement of significant tariff increases on April 2, dubbed “Liberation Day,” has already disrupted bond markets, with yields spiking as markets grapple with what Powell described as a “historically unique development.”
The tariffs, which Powell noted are much larger than anticipated, pose a complex challenge for the Fed. He explained that they are “highly likely” to drive at least a temporary uptick in inflation, though he refrained from committing to whether these price pressures would fade quickly or persist. This marks a shift from his earlier March stance, when he aligned with Treasury Secretary Scott Bessent’s view that tariff-induced inflation would be “transitory.” Powell now acknowledges the possibility of longer-lasting effects, depending on how quickly tariff costs ripple through to consumer prices and whether long-term inflation expectations remain stable. Fed Governor Chris Waller, however, suggested this week that a temporary inflationary surge could allow the Fed to focus on underlying economic trends, potentially supporting an interest rate cut if growth and employment weaken significantly.
Powell’s remarks reflect the Fed’s broader struggle to navigate an economy facing heightened uncertainty. He described the U.S. economy as still “solid” but noted that growth in the first quarter of 2025 has slowed compared to the previous year’s robust pace, even before the full impact of the April tariffs. The bond market’s recent volatility, which Powell attributed to markets processing the tariff shock, is expected to continue as investors adjust to this new reality. He emphasized that markets remain “orderly” and are functioning as expected under such uncertainty, but the Fed faces a “very difficult judgement” if inflation and employment goals diverge. In such a scenario, Powell said the Fed would weigh how far the economy is from each goal and the time needed to close those gaps.
Monetary policy and trade dynamics certainly underscore the gravity of the Fed’s predicament. Tariffs, by increasing the cost of imported goods, can drive up prices for consumers and businesses, contributing to inflation. At the same time, they can dampen economic growth by reducing trade and consumer purchasing power, potentially weakening the labor market. The Fed’s dual mandate becomes particularly tricky in this context, as raising interest rates to curb inflation could further slow growth, while keeping rates low to support employment might exacerbate price pressures. Powell’s decision to “wait for greater clarity” before adjusting rates reflects a prudent strategy, given the uncertainty surrounding the tariffs’ full economic impact. Historical examples, such as the trade disputes of 2018-2019, showed that tariff effects can vary widely, sometimes causing short-lived price spikes and other times leading to prolonged supply chain disruptions.
The Fed’s current debate over whether tariff-related inflation is temporary or persistent is critical. If inflation proves transitory, as Waller hopes, the Fed could maintain or even loosen policy to support growth. But persistent inflation might force tighter policy, risking a slowdown in an already cooling economy. Powell’s focus on keeping long-term inflation expectations “well anchored” is key, as unmoored expectations could lead to a wage-price spiral, where workers demand higher wages to keep up with rising costs, further fueling inflation. For now, Powell’s measured tone and openness to multiple scenarios suggest the Fed is preparing for a range of outcomes, with upcoming economic data likely to shape its next moves. The central bank’s ability to adapt to this tariff-driven uncertainty will be crucial in maintaining economic stability.
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