Federal Reserve Chair Jerome Powell delivered a speech on Wednesday expressing his concerns about the potential dilemma the central bank could face in balancing controlling inflation and supporting economic growth. The uncertainty surrounding President Donald Trump’s tariffs has heightened the challenge for the Fed, as Powell anticipates higher inflation and lower growth but is unsure where to focus their efforts.
In his remarks before the Economic Club of Chicago, Powell acknowledged the potential tension between the Fed’s dual-mandate goals of ensuring stable prices and full employment. The imposition of tariffs by the Trump administration poses threats to both objectives, as tariffs effectively act as a tax on imports, impacting inflation and economic growth.
During a question-and-answer session following his speech, Powell emphasized that tariffs are likely to move the economy further away from its goals for the remainder of the year. While he did not provide any indication of the direction of interest rates, Powell stated that the Fed is currently well-positioned to wait for more clarity before considering any policy adjustments.
In the event of higher inflation, the Fed would maintain or increase interest rates to curb demand, while in the case of slower growth, the central bank might consider lowering interest rates. Powell underscored the importance of keeping inflation expectations in check to prevent any adverse outcomes.
Market expectations suggest that the Fed may start reducing rates in June, with the possibility of three or four quarter-point cuts by the end of the year. While Fed officials typically view tariffs as a temporary inflationary impact, the broad scope of the Trump administration’s tariffs could alter this trend.
Powell highlighted the rise in near-term inflation measures, driven by tariffs, while noting that the longer-term inflation outlook remains close to the Fed’s 2% target. He stressed the importance of anchoring longer-term inflation expectations to avoid persistent inflationary effects.
The speech echoed Powell’s earlier remarks in Virginia and addressed the threats to both growth and inflation. With GDP growth in the first quarter expected to show minimal expansion, Powell cited strong motor vehicle sales but modest overall consumer spending. He also noted the impact of strong imports in the first quarter due to businesses rushing to mitigate potential tariff effects.
Despite the expected slowdown in growth, Powell described the economy as being in a solid position. The Commerce Department’s report on retail sales exceeding expectations in March, driven in part by anticipation of tariffs, further highlighted the challenges facing the Fed in balancing inflation and growth.
Overall, Powell’s speech underscored the complexities facing the Fed in navigating the impact of tariffs on the economy. As uncertainties persist, the central bank remains vigilant in assessing the evolving economic landscape to make informed policy decisions.
