In a speech delivered on Wednesday, Federal Reserve Chair Jerome Powell conveyed apprehension regarding the delicate balance the central bank must maintain between controlling inflation and fostering economic growth.
Powell noted that, amid rising uncertainty surrounding the effects of President Donald Trump’s tariffs, he anticipates an increase in inflation paired with diminished growth. However, he emphasized the challenge of determining where the Fed’s focus should lie amidst these competing pressures.
“We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension,” Powell stated during his remarks at the Economic Club of Chicago. He elaborated that if such a situation arose, the Fed would assess how far the economy deviates from each objective, as well as the varying timelines for addressing these discrepancies.
The Federal Reserve is tasked with ensuring both stable prices and maximum employment. Economists, including those within the Fed, warn of potential threats to both objectives due to the imposition of tariffs, which effectively act as a tax on imports. The historical correlation between tariffs and inflation, however, has been inconsistent.
During a subsequent question-and-answer segment following his speech, Powell acknowledged that tariffs are “likely to move us further away from our goals … probably for the balance of this year.”
While Powell refrained from offering specific guidance on interest rate trajectories, he indicated that the Fed remains in a position to await more clarity before contemplating any policy adjustments.
As Powell spoke, stock prices fell to their session lows while Treasury yields also dropped.
Should inflation rise, the Fed would consider maintaining or raising interest rates to cool down demand. Conversely, slower growth could prompt a reduction in interest rates, with Powell underscoring the importance of controlling inflation expectations.
Market analysts are projecting that the Fed will begin lowering rates in June, anticipating three or four quarter-percentage-point cuts before the close of 2025, as indicated by insights from the CME Group’s FedWatch tool.
Fed officials typically view tariffs as a one-time shock to pricing; however, the extensive nature of Trump’s tariffs may disrupt this perception.
Powell pointed out that both survey- and market-based gauges of near-term inflation have increased, though the long-term forecast remains near the Fed’s target of 2%. He projected that the Fed’s preferred inflation metric could reveal a rate of 2.6% for March.
“Tariffs are highly likely to generate at least a temporary rise in inflation,” Powell remarked. “The inflationary effects could also be more persistent. Avoiding that outcome will depend on the magnitude of the impacts, the duration of their complete infiltration into prices, and ultimately, on maintaining stable long-term inflation expectations.”
The address mirrored an earlier speech Powell gave in Virginia, with several passages being identical.
Highlighting risks to growth, Powell mentioned that the Gross Domestic Product (GDP) for the first quarter, set to be released later this month, is expected to reflect minimal growth in the U.S. economy for the January-March timeframe.
Indeed, he stated, “The data in hand so far suggest that growth has slowed in the first quarter from last year’s solid pace. Despite strong motor vehicle sales, overall consumer spending appears to have grown modestly. Additionally, significant imports during the first quarter, spurred by businesses reacting to potential tariffs, are likely to hinder GDP growth.”
On the same day, the Commerce Department announced that retail sales saw an unexpected rise of 1.4% in March. This growth was largely driven by car buyers who were making purchases ahead of the tariffs, although several other sectors also reported solid gains.
In response to the report, the Atlanta Fed estimated a potential GDP contraction of -0.1% for Q1 after accounting for an unusual spike in gold imports and exports. Despite the anticipated slowdown, Powell characterized the economy as being in a “solid position.”
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