Federal Reserve Chair Jerome Powell made clear the US central bank won’t rush to react to sweeping Trump administration tariffs, or to the financial market turmoil that has ensued amid fears of a global economic downturn.
Tariffs are likely to have a significant effect on the US economy, including slower growth and higher inflation, Powell said Friday at a conference in Virginia. But, he added, Fed officials will wait to gain more clarity on those policies before lowering interest rates.
He also emphasized that, with inflation still elevated, the central bank had an obligation to make sure a temporary price boost from tariffs doesn’t turn into something more persistent.
“The Fed is in no position to offer the kind of insurance to the economy that they did in the 2018, 2019 trade war because inflation is too high and it’s above their target,” said Julia Coronado, founder of the research firm MacroPolicy Perspectives, who sees a recession in the second half of the year. “Even if they conclude that they need to cut rates, they’re likely to go later and slower than they would otherwise because we will be in the middle of an inflation impulse.”
Stocks plummeted Friday, continuing a rout that started after President Donald Trump announced sweeping new tariffs on imports from across the globe. The S&P 500 was on pace for its worst week since the Covid lockdowns of March 2020 and Treasuries rallied, sending 10-year yields below 4%.
Economists and market participants have ratcheted up expectations that tariffs will plunge the economy into a recession, driving some to increase bets the Fed will need to cut rates sooner than previously expected.
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Powell’s comments represented a departure from his remarks last month that any inflation impact from tariffs would likely be short lived.
Fed’s ‘Obligation’
“Our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem,” Powell said at the Society for Advancing Business Editing and Writing annual conference. “We are well positioned to wait for greater clarity before considering any adjustments to our policy stance.”
The Fed chief noted the central bank’s tools can either slow or stimulate an economy, and it would need to pick one or the other if both inflation is accelerating and growth is weakening. But, he added, that’s not happening yet.
See also: JP Morgan says Trump’s tariffs to send US into recession
Friday’s remarks suggested Powell may lean more in favour of fighting higher prices, should such a conflict emerge.
The central bank’s stance could set up the Fed for a confrontation with Trump, who has repeatedly called for it to lower interest rates. Several of Powell’s colleagues have also said their focus on inflation might take priority over hits to employment if both start to deteriorate.
Shortly before Powell’s speech, Trump said on Truth Social that it is a “PERFECT” time for Powell to cut interest rates. “He is always ‘late,’” Trump posted. “CUT INTEREST RATES, JEROME, AND STOP PLAYING POLITICS!”
The Fed has stayed on the sidelines so far this year, leaving rates unchanged after cutting them by a full percentage point in the last few months of 2024. Many policymakers say that interest rates, currently in a range of 4.25%-4.5%, are still weighing on the economy, an appropriate stance since inflation remains above the Fed’s 2% goal.
With memories of the Covid price spike still fresh, Fed officials are worried that the price impact of tariffs could ingrain the public with higher inflation expectations.
Powell on Friday repeatedly pointed to the high levels of uncertainty surrounding the ultimate economic impact of tariffs and other fiscal policies, including proposed tax cuts, deregulation and changes to immigration. While surveys show a souring of consumer sentiment and a pull back in business spending plans, those haven’t yet materialized in hard data, Powell argued, adding that the high levels of uncertainty would fade over the next year.
“Inflation is going to be moving up and growth is going to be slowing,” Powell said. “But to me its not clear at this time what the appropriate path for monetary policy will be, and we’re going to need to wait and see how this plays out before we can start to make those adjustments.”
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No Fed Put
Fed officials will next gather May 6-7 in Washington. Futures markets, which had increased their odds of a cut at that meeting to about 50%, pared that following Powell’s remarks to about 30%.
Market participants hoping for a so-called Fed put, where the central bank cuts interest rates to soothe troubled markets, were disappointed Friday, sending stocks lower.
“His remarks underline that we are still a long way from the macro and market data that might generate a ‘Fed put,’” Krishna Guha, chairman of Evercore ISI, wrote Friday in a note to clients. “He is seeking to lock down expectations so that the Fed retains its latitude to cut if/when unemployment rises materially — though not before then, with preemptive action impossible given the size of the tariff inflation surge.”
For Powell, there’s no rush yet.
“It feels like we don’t need to be in a hurry,” he said. “It feels like we have time.”
