In his recent address at a conference in New York, the head of the Federal Reserve, Jerome Powell, indicated a likely pause in altering the key interest rate in the upcoming months. This decision is influenced by vast uncertainties brought about by the policies of President Donald Trump. Powell noted that the current administration is enacting changes across crucial sectors such as trade, tax, immigration, and regulation. The combined impact of these changes will significantly influence economic conditions and, consequently, the Federal Reserve’s monetary policies.
Despite some developments, particularly in trade, the expected ramifications are still unclear, Powell pointed out. He highlighted the importance of differentiating substantial information from trivial noise as they assess the economic landscape, stressing patience until there is better clarity. Meanwhile, many economists predict that Trump’s proposed tariffs on various imports, delayed partially, are likely to inflate prices and slow economic growth; however, tax reductions and deregulation might provide an economic boost.
Powell’s remarks led to a re-evaluation among traders regarding their projections for upcoming interest rate cuts, which they had anticipated could be at least three this year following several weaker economic reports. However, Powell reiterated that the Federal Reserve is likely to maintain its current stance for a while, which resulted in an increase in Treasury yields. A reduction in rates could potentially lower borrowing costs for mortgages, auto loans, and business loans.
During a question and answer session, Powell acknowledged that tariffs may lead to a “one-time” increase in prices rather than sustained inflation, which could allow the Federal Reserve to overlook such temporary impacts. Treasury Secretary Scott Bessent echoed this view, expressing minimal concern over inflation. However, Powell emphasized that ongoing tariff hikes or significant increases could warrant a different approach due to their potential broader impacts.
Long-term inflation expectations are crucial, according to Powell, who noted that despite recent concerns about tariffs, long-term expectations have remained steady. Changes in economic behavior based on inflation expectations can affect actual inflation, leading businesses to adjust their pricing in anticipation of rising costs. Powell reflected on previous tariff impositions, which led the Federal Reserve to lower its rates due to a substantial weakening in growth.
Despite the economic challenges amid heightened uncertainties, Powell described the overall economic state as predominantly healthy. The recent jobs report, revealing an increase of 151,000 jobs and a slight rise in the unemployment rate to 4.1%, aligns with solid economic gains from the previous six months. However, there are indications of slowed consumer spending and increased uncertainty in economic forecasts from surveys of both consumers and businesses. Powell admitted that consumer sentiment measures have been unreliable predictors of actual spending behaviors in recent years.
The mention of “uncertainty” surged in the Federal Reserve’s recent beige book, a compilation of business anecdotes, increasing from 17 mentions in January to 47 currently. Powell’s address took place at an event hosted by the University of Chicago’s Booth School of Business. The Federal Reserve’s ongoing attention to President Trump’s inconsistent tariff policy and governmental workforce changes has significantly heightened uncertainty and diminished consumer confidence. Many economists have downgraded their growth forecasts, predicting the economy might expand by merely 1% annually over the first quarter, a decline from the previous quarter’s 2.3%.
Christopher Waller, a Federal Reserve governor, differentiated between “good news” and “bad news” rate cuts, explaining that the latter occurs when economic slowdown prompts rate reductions, while “good news” cuts reflect the Federal Reserve’s confidence in reaching its 2% inflation target. Waller expressed optimism in the potential for “good news” cuts later this year, though he dismissed expectations of a cut at the upcoming meeting.
Following three rate cuts last year that brought the key rate to approximately 4.3%, Powell hinted in January at a pause in further reductions, given that inflation continues to exceed its target. The central bank’s preferred inflation measure indicates a 2.5% price rise year-over-year as of January, with core prices—excluding volatile food and energy categories—increasing by 2.6%, marking the smallest increment since June.
