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Donald Trump’s tariffs are “likely” to jeopardize the Federal Reserve’s objectives of maintaining prices and unemployment, warned chair Jay Powell, emphasizing the central bank’s focus on inflation.
During a speech to the Economic Club of Chicago, Powell stated, “The [Trump] administration is implementing significant policy changes, with trade being the current focus. The effects of these changes are expected to steer us away from our goals.”
While the US rate-setters strive to balance the goals of keeping inflation around 2 percent and maximizing employment, Powell pointed out that “without price stability, we cannot achieve prolonged periods of strong labor market conditions.”
The Fed chief also noted that the tariffs announced by the president have been “larger than anticipated,” indicating that the economic repercussions, including higher inflation and slower growth, will likely exceed expectations.
As Powell addressed the potential challenges posed by Trump’s tariffs, he mentioned that US rate-setters may face a scenario where their dual-mandate goals are in conflict. In such a situation, the Fed would assess how far the economy is from each goal and the differing time frames for closing those respective gaps.
Several Fed officials, including John Williams and Christopher Waller, have suggested that inflation could spike in the coming months due to the proposed tariffs. While Waller believes the impact will be short-lived, other FOMC members fear that Trump’s tariffs could lead to prolonged inflationary pressures.
The Fed’s preferred personal consumption expenditures price index rose by 2.5 percent annually in February, surpassing the central bank’s target. Surveys indicate that consumers and businesses anticipate significant price increases as the effects of the import taxes ripple through the economy.
The Trump administration’s policies have prompted the Fed to adopt a “wait and see” approach following rate cuts in the latter part of last year. The central bank has maintained its benchmark federal funds target range at 4.25-4.5 percent this year, asserting readiness to respond once the economic impacts of the president’s policies on American businesses and households become apparent.
