Jerome Powell made it clear: the Federal Reserve is stuck between two fires. Goods inflation is creeping higher thanks to tariffs, while services are still seeing disinflation. Meanwhile, the labour market is cooling sharply.
“This is a challenging situation,” Powell said. “Ordinarily, when the labour market is weak, inflation is low. But right now, we face two-sided risks of weaker growth and higher inflation. There is no risk-free path.”
On tariffs: 'One-time price shift' but Fed can’t be complacent
The chair played down fears of a runaway inflation spiral from Trump’s tariffs.
“The effects will likely be a relatively short-lived one-time shift in the price level,” he said. “But our job is to make sure that does not become an ongoing inflation problem.”
Powell rejected the administration’s line that foreign exporters pay tariffs. “It’s very clear importers mostly pay tariffs, and some costs have passed through to consumers,” he said. Companies, especially smaller ones, are running out of room to absorb costs.
On labor markets: immigration, AI, and stagnation risk
Powell attributed much of the labour market’s weakness to immigration curbs.
“The slowing likely reflected a decline in the growth of the labour force due to lower immigration and lower participation,” he said.
He also acknowledged the uncertainty around artificial intelligence. “It’s probably a factor in the labour market slowing,” Powell said. “But it’s hard to tell how big the effect is.”
Key quotes from Powell
On Fed independence: “We don’t frame these questions at all in terms of political outcomes. Everything we do is in service to our public mission. It is deeply in our culture to focus on data and never consider anything else.”
On cuts: “A quarter-point cut in itself won’t make a huge difference. It’s the whole path of rates that influences expectations.”
On dissent within the Fed: “Disagreement is actually healthy at a time when economic signals are so mixed. It would be unusual if there was a high degree of agreement.”
On risk balance: “The risks of higher and more persistent inflation have probably become a little less, in part because the labour market has softened.”
On forecasting: “Forecasting is very difficult even in placid times. Right now is a particularly challenging time, even more uncertain than usual.”
Miran controversy: Powell dodges, stresses independence
On Stephen Miran, Trump’s pick for the Fed who remains on leave from the White House, Powell refused to be drawn in.
“We’re strongly committed to maintaining our independence,” he said, adding no further comment. Critics across the political spectrum have warned the arrangement creates a conflict of interest.
Markets shrug, modest moves despite dovish tilt
Stocks swung back and forth on Wednesday as investors tried to gauge the Federal Reserve’s stance on rate cuts. The Dow gained 260 points, or 0.56 percent, after briefly dipping into the red, while the S&P 500 ended flat and the Nasdaq slipped 0.2 percent, trimming earlier losses. The moves came after the Fed delivered an expected quarter-point rate cut. Powell described the decision as a 'risk management' cut rather than a sign of recession.
Growth, he said, is still projected to be slightly higher through 2027 than previously estimated.
There are two more meetings left this year. Projections show two more cuts. But Powell admitted there’s division: seven of 19 Fed officials see fewer cuts ahead.
“We see that the labour market is softening and we don’t need it to soften any more,” Powell said. “There are no risk-free paths now. It’s not incredibly obvious what to do.”
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