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 that followed his speech, he admitted there is a “strong likelihood” that the economy will be moving 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.”
Federal Reserve Chairman Jerome Powell. (AP Photo/Manuel Balce Ceneta) ·ASSOCIATED PRESS
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.”
Read more: How much control does the president have over the Fed and interest rates?
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.”
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, adding that “the inflationary effects could also be more persistent.”
Read more: What Trump’s tariffs mean for the economy and your wallet
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 US economy “is still in a solid position” 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.
Markets are currently pricing in about three cuts this year from the Fed. That’s down from as many as four to five cuts a few weeks ago.
Fed policymakers retained their outlook for two cuts this year at their March policy meeting but stressed the considerable amount of uncertainty around their outlook.
Separately Wednesday, Cleveland Fed president Beth Hammack said in a speech in Ohio that there is a strong case to hold rates steady to balance the risks coming from further inflation and a slowing job market.
She said tariffs that have been put in place constitute a “substantive change in trade policy,” stressing it will take some time for the overall economic effects to become clearer.
President of the Federal Reserve Bank of Cleveland, Beth Hammack. REUTERS/Ann Saphir/File Photo ·Reuters / Reuters
Hammack noted that data for the just-completed first quarter point to a step down in growth as consumers and businesses have grown more cautious.
“Much of this hard data is backward-looking, and we as policymakers must consider the possibility that we may not be in Kansas anymore,” she said.
Hammack said that with inflation elevated, the “current modestly restrictive stance” for monetary policy is appropriate to continue pushing down inflation. If the economy falters and inflation drops, she said then the Fed may need to lower rates — “perhaps even quickly.”
But Hammack noted if higher inflation is paired with a slowing labor market, then the Fed will face challenging tradeoffs for setting rates. She said, in that case, it will be important to ensure inflation expectations remain well anchored.
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