‘Tariffs will hit harder than expected, and inflation may stick,’ warns Fed Chair Powell

If tariffs result in a short-term price hike, the Fed may tolerate the inflation spike while closely monitoring labor market conditions.

Federal Reserve Chair Jerome Powell cautioned on Friday that President Donald Trump’s new tariffs—larger than initially expected—could lead to prolonged inflation and slower economic growth, complicating the Fed’s policy decisions.

Speaking at a conference for business journalists, Powell said, "We face a highly uncertain outlook with elevated risks of both higher unemployment and higher inflation," noting that these risks could undermine the central bank’s dual mandate of maintaining 2 percent inflation and maximum employment.

He further stressed that while tariffs typically cause a temporary rise in inflation, the latest increases could have more lasting effects. "It is now becoming clear that the tariff increases will be significantly larger than expected. The same is likely to be true of the economic effects, which will include higher inflation and slower growth," he said.

The uncertainty surrounding trade policies has put the Fed’s interest rate stance on hold. "We are well positioned to wait for greater clarity before considering any adjustments to our policy stance," Powell stated, adding that it is too soon to determine the appropriate course for monetary policy.

Financial markets have been anticipating significant rate cuts this year to counteract an economic slowdown, according to Axios. However, Powell’s remarks suggest the Fed is not rushing into such decisions. If tariffs result in a short-term price hike, the Fed may tolerate the inflation spike while closely monitoring labor market conditions, Axios adds.

The greater concern, Powell noted, is that persistent inflation could shake consumer confidence in price stability, potentially triggering a cycle of rising costs. "The Fed's obligation is to make certain that a one-time increase in the price level does not become an ongoing inflation problem," he emphasized.