A significant increase in tariffs could higher inflation, slower growth and rising unemployment, said U.S. Federal Reserve Chairperson Jerome Powell in a press conference. Powell added that there is a possibility that inflation could remain persistent.
"I think there's a great deal of uncertainty about where tariff policies are going to settle out, and also when they do settle out, what will be the implications for the economy, for growth, and for employment. I think it's too early to know that," said the Chair.
The Trump administration is entering into negotiations with many countries over tariffs. "We'll know more with each week and month that goes by about where tariffs are going to land, and we'll know what the effects will be when we start to see those things," he added.
The Federal Reserve has decided to extend its wait and watch approach. The data-dependent central bank said the appropriate action at the current juncture is to remain patient on tariff-related developments. At the current juncture, the Fed is well-positioned to wait for greater clarity on tariff-related developments before adjusting the monetary policy.
"We've still got an economy that looks like it's growing at a solid pace. The labor market appears to be solid. Inflation is running just a bit above 2 percent. So it's an economy that's been resilient and is in good shape. And our policy is sort of modestly or moderately restrictive," Powell added.
As a result, the Chair said, "The costs of waiting to see further are fairly low. So that's what we're doing. And we'll see."
Also Read | Federal Reserve keeps interest rate unchanged amid uneconomic concerns, flags inflation risk
The Federal Reserve decided against taking a presumptive cut, given that inflation remained stubbornly above the 2-percent tolerance mark. The Chair harkened back to the three cuts the central bank undertook in 2019. "But the situation [in 2019]was that you had a weakening economy, and you had inflation at 1.6 percent. So that's a situation where you can move preemptively. Now we have inflation running above target."
Depending on the tariffs, there is an expectation, conditional on what happens, that there will be upward pressure on inflation. "In any case, it's not a situation where we can be preemptive because we actually don't know what the right response to the data will be until we see more data."
The Fed Chair's statement came following the central bank's decision to keep interest rates steady at the at 4.25 percent to 4.5 percent, citing that 'uncertainty' around economic outlook has risen in the last few weeks.
"The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated," said the Federal Reserve, in a statement.
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