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.