Federal Reserve Chairman Jerome Powell said Wednesday the central bank will “wait for greater clarity” before considering any interest rate adjustments as he expects President Trump’s tariffs to generate “higher inflation and slower growth.”
Those twin developments, he acknowledged during a Chicago speech, could create a major dilemma for the Fed — which is obligated to keep prices stable while also maximizing employment.
“We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension,” he said.
During a question-and-answer session following his speech, he admitted there is a “strong likelihood” that the economy will move away from both of the Fed’s goals for the “balance of the year, or at least not making much progress.”
That may lead to a “very difficult judgment” for the central bank, Powell acknowledged.
What the Fed would do in that scenario is “consider how far the economy is from each goal, and the potentially different time horizons over which those respective gaps would be anticipated to close.”
Powell also spoke about the recent turmoil in the bond market as yields soared in the wake of Trump’s April 2 “Liberation Day” tariff announcement, saying that markets are “orderly and they are functioning kind of as you would expect them to in a period of high uncertainty.”
He attributed the turmoil to “markets processing a historically unique development” and warned that he expects “continued volatility.”
The Fed chair again reiterated the independence of his institution and his own job, saying it’s “a matter of law,” and pledged not to act in response to any political pressure.
He discussed a case before the Supreme Court that is testing Trump’s ability to remove board members at other independent agencies in Washington, D.C., a case that some Fed watchers worry could threaten Powell if the administration wins.
But Powell said “I don’t think that’s a case that will apply to the Fed.” Nonetheless, the central bank is “monitoring it carefully.”
Powell on Wednesday repeated some points about the relationship between tariffs and inflation he made during his last speech on April 4, noting that it’s not yet known whether inflation produced by the duties will be temporary or more persistent.
Avoiding longer-lasting inflation “will depend on the size of the effects, on how long it takes for them to pass through fully to prices, and, ultimately, on keeping longer-term inflation expectations well anchored.”
‘Transitory’
Fed officials are currently grappling with how to respond to Trump’s aggressive slate of new tariffs, with a debate underway about which side of the central bank’s dual mandate will be more important to protect in the coming months.
Treasury Secretary Scott Bessent has argued that the Fed should consider any inflation produced by tariffs to be temporary, and Powell initially agreed with that view, saying in March that his baseline scenario was that any price increases would prove to be “transitory.”
But he has since backed away from that stance, and did so again on Wednesday by leaving many options open. “Tariffs are highly likely to generate at least a temporary rise in inflation,” he said, while adding that “the inflationary effects could also be more persistent.”
Some other Fed policymakers have also said they worry the price changes could be longer lasting instead of temporary, but Fed governor Chris Waller this week said a surge in tariff-related inflation could in fact be “temporary.”
That, Waller said, would allow him to “look through it and determine policy based on the underlying trend,” perhaps supporting a rate cut if the impact on growth and employment is longer lasting.
Powell on Wednesday said the U.S. economy “is still in a solid position” despite “despite heightened uncertainty and downside risks.”
He did note that “data in hand so far suggest that growth has slowed in the first quarter from last year’s solid pace” — but that was also before the impact of Trump’s most aggressive tariffs announced in early April.
For more of this article written by Yahoo Finance senior reporter Jennifer Schonberger, please visit:
https://finance.yahoo.com/news/powell-sees-challenging-scenario-for-fed-if-trump-tariffs-stoke-inflation-and-slow-growth-173002914.html
#youtube #tariffs #trump
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