Topline
Tariffs will probably worsen inflation, Federal Reserve Chairman Jerome Powell said Wednesday, echoing widespread warnings about the impact of President Donald Trump’s trade policies, and crucially indicating tariff-related price increases may complicate the Fed from pursuing further interest rate cuts.
Federal Reserve Chairman Jerome Powell delivers remarks at a news conference following the FOMC’s … More
Key Facts
“Tariffs are highly likely to generate at least a temporary rise in inflation,” Powell said in prepared remarks at the the Economic Club of Chicago.
That would put the Fed in the “challenging scenario in which our dual-mandate goals are in tension,” nodding to the yoyo the Fed operates between in ensuring stable prices and a stable labor market, which would likely face vulnerability if the U.S. enters an economic downturn amid tariff-based uncertainty.
Powell signaled the central bank is prepared to take a wait-and-see approach on pursuing the interest rate cuts yearned for by Trump and many others, explaining: “For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance.”
Crucial Quote
“Our role is to make sure this will be a one-time increase in prices and not something that turns into an ongoing inflation process,” Powell said in a moderated discussion Wednesday.
Stocks Fall On Powell’s Remarks
Stock market losses accelerated after Powell struck a cautious tone. The Dow Jones Industrial Average dropped 590 points, or 1.5%, on the day by mid afternoon, while the S&P 500 fell 2.2% and the tech-heavy Nasdaq declined 3.3%. About half of all three indexes’ daily declines followed Powell’s afternoon speech. “Markets are struggling with a lot of volatility,” said Powell, who mentioned the significant uncertainty surrounding Trump’s economic policies. “But having said that, markets are functioning,” he added. Worst hit in Wednesday’s selloff were big technology stocks often most sensitive to broader economic fears, as shares of Amazon, Apple, Microsoft and Nvidia all declined at least 3%.
Key Background
Powell leads the Federal Open Markets Committee, which determines the range of the target federal funds rate. That only nominally determines the borrowing costs of overnight transactions between financial institutions, but it heavily influences the cost of all loans from mortgages to corporate bonds. That’s why consumers and investors alike are all typically hungry for the Fed to lower rates, as cheaper borrowing costs help stimulate spending across the economy, and help equity valuations as the cost of doing business shrinks. But the Fed has kept rates at a historically high level of more than 4% since late 2022, as it seeks to combat inflation, which has run above the central bank’s target for the last four years. Powell, who was appointed by Trump to his role in charge of U.S. monetary policy in 2017, has been a frequent target of Trump’s ire during both of the latter’s presidential terms, and Trump called on Powell this month to lower rates.
Further Reading
