Tariffs may undermine Fed’s ability to contain inflation, support growth: Powell

Jerome Powell, Federal Reserve Chairman 

Federal Reserve Chairman Jerome Powell expressed concerns that the tariffs imposed under the Trump administration could weaken the central bank’s ability to manage inflation and sustain economic growth, amid uncertainty over the potential impact of ongoing trade policies.

In his speech before the Economic Club of Chicago on April 16, Powell noted that inflation is expected to rise while economic growth is projected to slow. However, it remains unclear which of the two challenges should take priority given the prevailing uncertainty. The Fed’s current stance is to wait for greater clarity before making any policy adjustments, reaffirming its commitment to maintaining long-term inflation expectations.

Powell emphasized the importance of not overreacting to temporary increases in prices, stressing that these should not be mistaken for structural inflation problems. He also pointed out that a strong labor market is heavily dependent on price stability. In that context, he expressed concern that tariffs have risen to levels higher than anticipated, even under unlikely scenarios, which could push the economy away from its dual mandate of full employment and price stability.

The impact of tariffs on inflation, Powell explained, depends on multiple factors, including their magnitude and the time it takes for their effects to ripple through the economy. He warned that the repercussions of tariffs on both inflation and growth may be more severe than initially expected, suggesting that the Fed’s focus will likely remain on ensuring inflation stays under control.

However, Powell highlighted that the labor market remains generally strong, yet without stable prices, the Fed cannot guarantee continued labor market strength. Data shows that growth slowed in the first quarter, with consumer spending growing modestly in March. Imports were robust as companies attempted to front-load goods ahead of expected tariffs.

Powell admitted that it’s difficult to pinpoint the cause behind the recent wave of sovereign bond selloffs. Additionally, there have been significant layoffs in certain areas, particularly those with high concentrations of universities, hospitals, and research institutes. Unemployment has remained stable, largely due to a decline in both labor supply and demand. He downplayed the impact of declining immigration rates on inflation.

On the financial system, Powell stated that US banks remain well-capitalized, and efforts are ongoing to address the challenges facing the commercial real estate sector. However, he cautioned that both the federal budget deficit and growing debt burdens are critical issues that require serious attention. The federal debt trajectory, he said, is on an unsustainable path.

Finally, Powell mentioned that reducing the Fed’s holdings of government bonds enables monetary tightening to continue for a longer period. He concluded by saying he expects market volatility to persist.