In Arlington, Virginia, the Federal Reserve Chairman expressed concerns about the Trump administration’s new tariffs, indicating they may spur inflation and potentially hinder U.S. economic growth. The tariffs’ effects are expected to be “significantly larger than expected” and could result in “at least a temporary rise in inflation,” although the possibility of more enduring effects exists. Jerome Powell emphasized the Fed’s duty to prevent a transient price increase from evolving into sustained inflation.
Powell’s observations imply that the Federal Reserve is likely to maintain the current interest rate near 4.3% in the months ahead. This stance contrasts with Wall Street’s anticipation of five rate cuts throughout the year, an expectation that surged following President Trump’s tariff announcement. Powell noted the full economic impact of these tariffs remains unclear, suggesting a cautious approach from the Fed as they wait for a clearer economic picture. Businesses have also expressed hesitation in making new investments due to this uncertainty.
President Trump, using his social media platform, urged Powell to lower interest rates, pointing to lower inflation and energy prices as reasons to do so. Trump’s comments highlight the balancing act faced by the Fed amid predictions that tariffs could weaken the economy, threaten employment, and increase prices. In such scenarios, the Fed could either reduce rates to stimulate growth or keep them steady to manage inflation, with Powell suggesting inflation is a primary concern.
Powell’s statements come shortly after Trump introduced substantial tariffs that disrupted the global economy, with China retaliating and stock prices plummeting globally. Powell’s current view of these economic measures is noticeably more negative compared to last month when he projected any tariff-induced inflation to be brief.
The combination of potentially weaker economic growth and rising prices presents a complex situation for the Federal Reserve. Traditionally, the central bank would reduce interest rates to boost the economy during slow growth periods, but it would raise or maintain rates to curb spending and tackle inflation, highlighting the challenging position they face.
The Fed’s legal mandate is to ensure maximum employment and price stability, with inflation targeted at 2% annually. Powell acknowledged that the new tariffs might complicate achieving both goals by raising prices and risking job losses. While the economy and job market currently appear stable, Powell noted increasing pessimism among consumers and businesses.
In positive employment news, the government reported an acceleration in hiring in March, adding 228,000 jobs, though the unemployment rate edged up to 4.2% from 4.1%. Despite these gains, the true impact of the tariffs remains uncertain, with job market assessments from mid-March not fully reflecting their potential repercussions. This uncertainty could affect business investment and hiring decisions moving forward.