Jerome Powell says higher inflation outlook keeping US Fed on hold for now

Fed officials signaled last week they favor two rate cuts by year’s end. Economists surveyed by Bloomberg expect a cut to come by September.

Powell, however, underscored that uncertainty in the economic outlook meant a wide set of outcomes remained possible. Should inflation come in weaker than expected or the labor market deteriorate, he said, the Fed could cut rates sooner. Equally, he added, higher-than-expected inflation could push the Fed to keep holding.

“Many paths are possible here,” Powell said.

He acknowledged that recent data supported a case for lower rates. But, he emphasized, that data was backward-looking, and many economists expect “a meaningful increase in inflation” over the course of this year due to tariffs.

“At this time, all forecasters are expecting pretty soon that some significant inflation will show up from tariffs,” he said. “We can’t just ignore that.”

Treasury yields and the dollar declined during Powell’s testimony as traders priced in slightly higher odds of at least two Fed interest-rate cuts by the end of the year. They pointed to his comments on the potential for tariffs to contribute less to inflation than forecasters currently expect. Powell’s appearance coincided with the release of a weaker-than-anticipated consumer confidence gauge for June that also supported those wagers.

Trump Comments

The central bank’s on-hold position has angered Trump, who has consistently called for lower rates and argued the Fed is keeping borrowing costs for the US government high by holding rates steady.

“‘Too Late’ Jerome Powell, of the Fed, will be in Congress today in order to explain, among other things, why he is refusing to lower the Rate,” Trump said on social media early Tuesday. “I hope Congress really works this very dumb, hardheaded person, over. We will be paying for his incompetence for many years to come.”

Powell and several other policymakers have pointed to increased economic uncertainty stemming from the Trump administration’s stepped up use of tariffs, and other policy changes, to justify leaving rates steady for now. Many forecasters expect the tariffs to put upward pressure on inflation and dent economic growth, although those estimates carry significant uncertainty.

Trump has frequently shifted on the specifics of his tariff policies, and the administration says it’s working on trade deals that could affect the nature and level of the duties.

“Expectations of that level, and thus of the related economic effects, reached a peak in April and have since declined,” Powell said in his opening statement, which largely echoed remarks he delivered last week. “Even so, increases in tariffs this year are likely to push up prices and weigh on economic activity.”

Powell said the tariffs’ impact on inflation could be short-lived or possibly be more persistent.

Tariff Effect

Avoiding the latter outcome “will depend on the size of the tariff effects, on how long it takes for them to pass through fully into prices and, ultimately, on keeping longer-term inflation expectations well anchored,” he said.

Economic data so far has shown limited impact from tariffs. Fed Governors Christopher Waller and Michelle Bowman have pointed to that dynamic, among other factors, in arguing the Fed could cut as soon as its next meeting in July.

Meanwhile, Powell described the overall economy and labor market as solid. He said inflation had eased significantly from highs reached in mid-2022, but was somewhat elevated above the Fed’s 2% objective. He added that beyond the next year or so, most measures of longer-term expectations remain consistent with the Fed’s inflation goal.