Federal Reserve Chair Jerome Powell said that the central bank could face limited flexibility to support the economy as it confronts the fallout of President Donald Trump’s trade tariffs.
According to The Wall Street Journal, Powell said that tariffs risk placing the Fed in a difficult position, forced to choose between addressing rising inflation or mounting unemployment.
Speaking at the Economic Club of Chicago, Powell said there is a “strong likelihood” that consumers will face higher prices and the economy will see greater joblessness in the near term as a result of tariffs. This, he noted, would put the Fed in a “challenging scenario” where moves to tame inflation could aggravate unemployment, and vice versa. “It’s a difficult place for a central bank to be, in terms of what to do,” he said.
Describing the policy dilemma, Powell likened it to a soccer goalie deciding which way to dive during a penalty kick—either toward inflation or slower growth. “We’ll make what will no doubt be a very difficult judgment,” he said.
The Fed, Powell explained, would weigh how far inflation strays from its 2% target, how weak the labour market becomes, and how long it might take to restore balance between the two. He hinted that the Fed may give priority to its inflation mandate if necessary. “Keeping in mind that, without price stability, we cannot achieve the long periods of strong labor market conditions that benefit all Americans,” Powell said.
The Fed’s immediate focus is to prevent short-term price hikes caused by tariffs from evolving into persistent inflation. Powell pointed to the 2022 rate hikes—the steepest in four decades—as a response to what the Fed had initially misread as “transitory” inflation. Prices, which had peaked above 7%, have since eased to around 2.5% earlier this year.
However, Powell warned that new global supply shocks, particularly those affecting manufacturing chains, could prolong inflation. Using carmakers as an example, he said tariffs might “disrupt significantly” complex assembly networks. “You would worry that that process will take some years and that the inflationary process might be extended,” he said. “When you think about supply disruptions, that is the kind of thing that can take time to resolve and it can lead what would’ve been a one-time inflation shock to be extended, perhaps more persistent.”
Given this uncertainty, Powell signalled the Fed is unlikely to cut interest rates unless there’s a notable uptick in unemployment. “As that great Chicagoan Ferris Bueller once noted, ‘Life moves pretty fast,’” he added. “For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance.”
Despite recent market volatility, Powell said there was no current need for intervention. “Markets are functioning, conditional on being in such a challenging situation,” he said.
Other Fed officials echoed his caution. “I would rather be slow and move in the right direction than move quickly in the wrong direction,” said Cleveland Fed President Beth Hammack.
But not all officials agree. Fed Governor Christopher Waller said any price impact from tariffs might be short-lived, and if tariffs trigger a recession, “I would expect to favor cutting” interest rates “sooner and to a greater extent than I had previously thought.”
James Bullard, former St. Louis Fed President, added that if a downturn hits, the Fed could ease policy as long as inflation expectations remain stable. “They need some help from the inflation data,” he said. “They need to be able to say that... inflation’s still coming down.”
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