Fed Chair Powell says tariffs may push inflation higher, and growth lower.

Key Takeaways

• Federal Reserve Chair Jerome Powell said President Donald Trump's larger-than-expected tariffs could stoke inflation and slow economic growth.
• The Fed is tasked with keeping inflation low and jobs plentiful, and tariffs have historically hurt both parts of the central bank's dual mission.
• The Federal Reserve kept its key rate of interest steady while waiting to find out which problem would emerge as the greatest economic threat.

The top central banker in the United States shares the same concerns as many other experts regarding what President Donald Trump’s “Liberation Day’ tariffs will bring about: higher inflation and slower growth. 

Jerome Powell, Federal Reserve Chair, spoke at an economic conference in Virginia on Friday. He gave his first reaction to Trump’s announcement of sweeping tariffs for U.S. trading partner. The tariff announcement helped resolve some policy uncertainty that had kept the Fed in a “wait and see” mode for the past few months. However, it was not enough to get Powell out of his “wait and see” mode.

Powell said: “It’s becoming increasingly clear that tariff increases are going to be much larger than expected. The same is likely true for the economic effects which will include increased inflation and slower growth.” “The duration of the effects is uncertain.” While tariffs are likely to cause an increase in inflation at least temporarily, it is also possible that these effects could be more permanent.

Forecasters agree that tariffs could increase the cost of living and cause inflation to last longer, while also slowing down the economy in the U.S.

The Fed’s policymakers are charged with keeping inflation low while maintaining high employment. The Fed can use its main tool to manipulate interest rates to solve one of these problems at a moment. This could put the Fed in a tight spot if inflation and the job markets worsen at the exact same time. The Fed can either increase interest rates to combat inflation or lower them in order to create easy money and boost the economy.

Fed officials are waiting to see what happens before they decide to change their key interest rate. The waiting game is likely to continue until it is clear which of two problems is the most pressing: high inflation or a collapsing labour market.

Powell said: “We’ve learned that the tariffs were higher than anticipated and higher than almost everyone predicted.” “We’re still not sure where this comes to rest. We’re going to have see it through.”