Federal Reserve Weighs Economic Impact of Trump's Tariffs amid Inflation Concerns

Jerome Powell, the Federal Reserve Chair, expressed on Friday that the new tariffs imposed by President Donald Trump are expected to increase inflation and slow down economic growth. He emphasized that the central bank is not ready to make any decisions on interest rates until there is more clarity on the long-term effects.

Speaking to business journalists in Arlington, Virginia, Powell highlighted the “highly uncertain outlook” the Federal Reserve is navigating due to the newly announced reciprocal tariffs by the President. Although he acknowledged the current strength of the economy, Powell reiterated the potential risks tariffs pose and the Fed’s priority to manage inflation effectively.

“Our duty is to maintain the stability of longer-term inflation expectations and ensure a one-off price level increase does not escalate into ongoing inflation issues,” Powell stated in his prepared address. “We are in a favorable position to wait for clearer insights before altering our policy stance. It’s premature to predict the proper path for monetary policy.”

His comments followed President Trump’s appeal to Powell, urging him to “stop playing politics” and to slash interest rates, citing reduced inflation levels.

Following Trump’s announcement of a 10% blanket tariff and higher reciprocal charges on key trading partners, there has been significant selling pressure on Wall Street.

Powell observed that the declared tariffs were “significantly larger than anticipated.”

“The economic repercussions are likely to be similarly substantial, leading to increased inflation and reduced growth,” he remarked. “The magnitude and duration of these consequences remain unpredictable.”

Concentrated on inflation, Powell stayed reserved about the Fed’s precise reaction to these changes. However, market sentiment currently anticipates a series of aggressive interest rate cuts starting in June, as suggested by data from the CME Group, with a growing possibility of reducing the central bank’s key borrowing rate by at least a full percentage point by year-end.

Yet, the Fed’s responsibility encompasses maintaining full employment alongside stable inflation. Powell underscored that to fulfill this mandate, it is crucial to keep inflation expectations in check—especially challenging with Trump levying tariffs on U.S. trade partners, who have already announced some retaliatory measures.

A heightened focus on inflation will likely deter the Fed from easing policies until the long-term impacts of tariffs on prices are clearer. Policymakers typically view tariffs as a temporary price surge rather than a primary inflation catalyst, yet the comprehensive scope of Trump’s measures might alter this perception.

“While tariffs are almost certain to induce at least a temporary inflation rise, there’s a chance that the effects could persist,” Powell explained. “Preventing such an outcome relies on maintaining well-anchored longer-term inflation expectations, understanding the size of the effects, and knowing how long they will take to fully impact prices.”

Core inflation was at 2.8% annually in February, marking a moderation but still surpassing the Fed’s target of 2%.

Despite heightened worries about tariffs, Powell stated that the economy remains “in a good place” with a strong labor market. However, he noted consumer surveys indicating growing inflation worries and diminishing future growth expectations. He made it clear that long-term inflation expectations remain aligned with the Fed’s goals.