Powell Reinforces Fed’s Stance Amid Inflation Risks from Tariffs

Federal Reserve Chair Jerome Powell reaffirmed on Wednesday the central bank’s commitment to preventing inflation risks from tariffs triggering prolonged inflationary pressures. Speaking at the Economic Club of Chicago, Powell stated that the Fed’s top priority is to keep long-term inflation expectations anchored. He emphasized that a one-time price spike should not evolve into a persistent inflationary cycle.

No Rate Changes Wait-and-See Strategy

Powell reiterated that the Fed is in no rush to alter its benchmark interest rate. This stance, first expressed on April 4, reflects the need for clearer insights into the economic effects of former President Donald Trump’s fiscal and trade proposals. The Fed is adopting a patient approach as it seeks a more accurate understanding of the economic outlook.

Markets React to Powell’s Remarks

Following Powell’s statements, U.S. stock markets deepened their losses and the yield on 10-year Treasury bonds fell slightly. However, the Fed Chair noted that financial markets are functioning normally despite volatility driven by global uncertainty.

Dual Mandate Under Pressure

Powell acknowledged that persistent inflation and a potential economic slowdown could put the Fed’s dual mandate—price stability and maximum employment—into conflict. If such a dilemma arises, the Fed will assess the extent of deviation from both objectives and the time required to address them.

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Impact of Trump’s Trade Agenda

Trump’s shift toward more aggressive tariffs—including a 10% global tariff and duties exceeding 100% on Chinese imports—has stirred concerns among markets and consumers. His proposals also target sectors such as technology, automobiles, steel, aluminum, pharmaceuticals, and semiconductors. Powell warned that the scale of these measures surpasses expectations and could exert more persistent pressure on prices.

Moderate Inflation Forecasts

Inflation, as measured by the Fed’s preferred gauge, stood at 2.5% year-over-year in February and is projected to decline to 2.3% in March. Although it remains above the 2% target, Powell highlighted the importance of preventing long-term inflation expectations from becoming unanchored. He stressed that this will depend on the scope and duration of tariff-related price transmissions.

Strong Employment and Balance Sheet Policy

Despite inflationary challenges, the labor market remains strong. In March, 228,000 jobs were added and the unemployment rate held steady at 4.2%. Powell also noted that the Fed’s balance sheet reduction process is still underway. Reserve levels remain high, allowing the Fed to continue trimming assets at a moderate and steady pace.