Federal Reserve Chair Jerome Powell has expressed concern about the central bank’s ability to both control inflation and support economic growth in the wake of U.S. President Donald Trump’s tariffs.
Speaking to the Economic Club of Chicago, Powell said that tariffs pose a “challenge” to the U.S. central bank as they are likely to lead to both higher inflation and lower economic growth, a situation known among economists as “stagflation.” Powell stressed that the U.S. Federal Reserve is unsure where it should devote greater focus — on lowering inflation or boosting economic growth.
“We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension,” said Powell in prepared remarks. “If that were to occur, we would consider how far the economy is from each goal, and the potentially different time horizons over which those respective gaps would be anticipated to close.”
Clarity Needed
The Fed Chair gave no hint as to where he sees interest rates headed this year, but said that, “For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance.” Markets are currently pricing in as many as four 25-basis point interest rate cuts from the central bank in 2025, according to the CME Group’s FedWatch indicator.
Powell also highlighted that the Fed’s own data shows near-term inflation on the rise. The central bank’s key inflation measure is expected to show an annualized rate of 2.6% for March, he said. The Fed aims to keep inflation at a 2% annualized target.
“Tariffs are highly likely to generate at least a temporary rise in inflation,” said Powell. “The inflationary effects could also be more persistent.” The Fed Chair added that U.S. gross domestic product (GDP) for the year’s first quarter is expected to show little growth in the American economy.
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