US shutdown likely weighed on economic activity, tariffs impacting inflation: Jerome Powell

Jerome Powell

• Powell: Tariffs raised inflation, but reopening should ease effects and boost growth
• US unemployment rate steady at 4.4% in December
• Fed held interest rates steady at 3.5% to 3.75% despite calls for cuts

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A temporary shutdown of the federal government likely weighed on economic activity last quarter, said Federal Reserve Chair Jerome Powell in a statement, adding that tariffs are impacting inflation.

However,  these effects should be reversed as the reopening boosts growth this quarter. In the labour market, indicators suggest that conditions may be stabilising after a period of gradual softening. The unemployment rate was 4.4% in December, and has changed little in recent months. Job gains have remained low.

" Inflation has eased significantly from its highs in mid 2022, but remains somewhat elevated, relative to our 2% longer run goal," added the Federal Reserve Chair.

"Estimates based on the consumer price index indicate that total PCE prices rose 2.9% over the 12 months ending in December, and that excluding the volatile food and energy categories, core PCE prices arose 3.0%." The elevated readings largely reflect inflation in the goods sector, which has been boosted by the effects of U.S. President Donald Trump's tariffs. In contrast, disinflation appears to be continuing in the services sector.Much of the increase in goods prices can be traced back to tariffs, added Powell.

While there are a range of estimates and a high degree of uncertainty, most analyses suggest tariffs account for the bulk of the overshoot. "That is actually encouraging, because if the pressure were coming from demand, it would be a far more difficult problem to address. Tariffs are expected to pass through as a largely one-time price increase."

Stripping out the impact of tariffs, core PCE inflation is running only slightly above 2 percent. The other positive development is in services inflation, where disinflation continues across categories. That points to healthier underlying trends.

The expectation is that tariff-related pressures on goods prices will work their way through the system, peak, and then begin to ease, provided there are no new, significant tariff hikes.

In its policy meeting on January 28, the US central bank held interest rates steady, defying President Donald Trump’s repeated calls for sharp cuts. Markets had largely anticipated the decision, with traders assigning only a slim chance of a rate cut, leaving the benchmark rate unchanged in the 3.5 percent to 3.75 percent range.