Federal Reserve Chair Jerome Powell says tariffs could lead to higher inflation. Yahoo Finance Fed Senior Reporter Jennifer Schonberger recaps Powell's comments and RSM Chief Economist Joe Brusuelas and Epistrophy Capital Research chief market strategist Cory Johnson give their reactions.
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Fed chair J Powell saying today the Central Bank is very much in a wait-and-see mode now that bigger than expected tariffs could lead to lower growth and possibly longer-lasting inflation. A change from a view that Fed chair Powell had a couple of weeks ago that inflation from tariffs could prove temporary.
It is now becoming clear that tariff increases will be significantly larger than expected. And the same is likely to be true of the economic effects, which will include higher inflation and slower growth.
He says that the outlook is highly uncertain and that there are now elevated risks to the downside and that higher for higher inflation, as well as employment, but that the economy is still in a solid place. Just ahead of Powell's remarks this morning, President Trump posted on his social media site, quote, "This would be a perfect time for Fed chairman Jerome Powell to cut interest rates. He's always late." He went on to say, "Cut interest rates, Jerome, and stop playing politics." But Powell noted on his own volition that the Fed is well-positioned to await clarity before adjusting interest rates.
It feels like we don't need to be in a hurry. It feels like we have time to. Yes, yes, it feels like we don't. No, I mean, it's like I said, you have you have inflation's gonna be moving up and and growth is gonna be slowing, but it isn't really. It's it's to me, it's it's not clear at this time what the appropriate path for monetary policy will be. And we're gonna need to wait and see how this plays out before we can start to make those adjustments.
Now Powell says he anticipates higher tariffs could lead to an increase in inflation in the coming quarters. Whether or not that proves longer lasting will hinge on long-term expectations, she tried to say, for inflation along with the size of effects from tariffs, as well as how long it takes for these tariffs to actually filter through to prices. And miles earlier this week, I spoke with New York Fed President John Williams who told me he thinks it could take a couple of years before these tariffs could filter through fully to prices. Of course, that came before the actual tariff announcement on Wednesday. Back to you.
All right. Yahoo Finance's Jen Schonberger with that report. Joe, I want to get your thoughts on what you made of Powell's speech this morning. And I think what struck the market, cuz the market hated it, was the the focus now on inflation, inflation expectations, and really pushing back against the pricing we saw just a day ago for four cuts in 2005. That doesn't feel realistic at all.
So, if you're a central banker and you have pressure on both sides of your mandate, and you're put in the corner, which Trump's really put Powell in a corner, you're going to lean towards the price stability. At this point, when you get tariffs, the Fed can look through if it's a one-time effect that doesn't have any other issues, right? Those two issues being retaliation. Well, you can start checking that box off, and inflation expectations rising. Once you see that, then the Fed really is in a box because if they see five-year forward break events begin to move to the upside decisively above 2.5 towards 3%, it's sitting at about 2.3% right now. They're hiking rates. They're not cutting. I don't know about you guys. Earlier today, the market had priced in five cuts, which is their way out over their skis. Right. Yeah. Yeah. Yeah. It's funny you say that because I was reading this speech today, and I was like, am I crazy for thinking this sounds like we could be raising rates this year?
No.
No, not at all. I mean, look, what John Williams said is serious as a heart attack. It could take up to two years for this to work through the system, and given the level of retaliation, and not just the idea of retaliation, but the breadth, scale of it, we really could have a surge in inflation here. My own forecast tells me 12 months from now, CPI and PC are going to be floating between 3 and a half and 4%, and that's if all goes well.
Let me let me translate. So what you're saying, or tell me what I heard, right. So what you're saying is that some people have had a notion that, yes, tariffs will cause inflation, but because inflation, by definition, is prices go how they compare to the last period, that in the next period, they'll be flat.
That's right.
But and that's been the belief coming in. Just that we targeted Jack Daniels whiskey and we targeted random Harleys. Harley Davidsons from Canada. But in in reality, we're going to see 24 months of increasing prices because it's gonna find its way through the economy and raise prices left and right, and pig farmers will go out of business, and we'll have all these changes that are driving down production and driving up prices.
Right, if there's no deal with the UK. Okay, I've got a speaking gig at the London US Embassy in October. I'm going to be I'm going to be paying an extra 25% to to to land. No, but seriously, that that's one of the issues. Is that's that's what's gonna happen. That's not in the psyche of the American public, nor is it in the psyche of policymakers. And that's where I think we might see the first rebellion inside the Republican held Congress to say, "Wait a second. Yeah. This is now going too far."
Yeah. Eggs is one thing, but now if we're talking about all the inflation, right, back to the 2022 story, certainly not something those lawmakers want to deal with.