Powell says Fed can 'wait for greater clarity' on tariffs before cutting interest rates
President Donald Trump’s on-again, off-again tariffs have been roiling markets and raising recession fears.
But Federal Reserve Chair Jerome Powell on Wednesday stuck to his slow and steady message: Let’s keep inflation contained and wait for greater clarity on a hazy outlook.
With Trump’s tariffs predicted to both increase inflation and slow the economy – leaving the Fed torn between its two missions - Powell reiterated that the central bank’s main job is to keep prices in check.
“Our obligation is to keep longer-term inflation expectations well anchored to make certain that a one time increase in the price level does not become an ongoing inflation problem,” Powell said in a speech at the Economic Club of Chicago.
His comments were in line with ones he made earlier this month – after Trump unveiled sweeping tariffs, but before he announced a 90-day pause on most of the highest levies.
At the same time, “We may find ourselves in the challenging scenario in which our dual mandate goals are in tension. If that were to occur, we would consider how far the economy is from each goal, and potentially different horizons over which those respective gaps would be anticipated to close.”
Put simply, the Fed raises interest rates or keeps them high to fight inflation and cool the economy. It lowers rates to jolt a weakening economy or dig it out of recession.
But Trump’s tariffs present unusual double-barreled worries: They’re expected to push up prices sharply and thus sap consumer spending that makes up 70% of economic activity. They’re also intensifying business uncertainty that could stifle investment and spur layoffs.
"Unemployment is likely to go up as the economy slows, in all likelihood, and inflation is likely to go up as tariffs find their way and some part of those tariffs come to be paid by the public," Powell said. "So that's the strong likelihood."
Powell is suggesting the Fed will decide when – and how much – to lower rates by assessing whether high inflation or a sagging economy poses the greatest risk.
“For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance,” Powell said.
Many economists expect the import duties to boost the Fed’s preferred inflation measure from 2.7% to as high as 4% to 5% later this year. But if the fees spark negotiations between the U.S. and other countries, they could nudge up inflation to just about 3%.
In a speech earlier this week, Fed Governor Christopher Waller said he believes there’s still a good chance officials can cut the central bank’s key interest rate later this year.
Under one scenario, in which very high tariffs remain in effect, he said he believes the boost to inflation could be large but temporary. Meanwhile, the negative effects on the economy could be significant, prompting the Fed to lower rates sooner and more sharply.
Alternatively, he said, the import fees could be significantly reduced through negotiations with other countries. In that case, the Fed could wait and see how much of the cost is passed to consumers and perhaps trim rates more modestly later in the year.
After lifting its key rate to a 23-year high in 2022 and 2023 to fight a pandemic-related inflation spike, the Fed lowered the rate substantially late last year. But stubbornly high inflation and concerns that Trump’s tariffs will reignite inflation have kept officials on hold.
In February and March, Trump slapped a 20% fee on Chinese shipments to the U.S.; 25% on imported steel and aluminum; 25% on all imported cars and light trucks; and 25% on some goods from Canada and Mexico not covered by the United States-Mexico-Canada Agreement.
This month, he ratcheted up the stakes with a minimum 10% fee on all imports and double-digit charges on dozens of countries before announcing a 90-day pause on the higher duties for nations other than China. Yet a hike of China’s tariff to 145% more than offset the concessions for other countries.
The President sowed further confusion last week by initially exempting smartphones, computers and other electronics from the higher tariffs before Commerce Secretary Howard Lutnick said they would be included in a coming duty for computer chips.
Bottom line: Many economists figure the average U.S. tariff on imports has soared from about 3% early this year to about 25%.
(This story was updated to add new information and to correct a typo.)