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[CHICAGO] US Federal Reserve chair Jerome Powell said on Wednesday (Apr 16) the Fed would wait for more data on the economy’s direction before changing interest rates, but cautioned that US President Donald Trump’s tariff policies risked pushing inflation and employment further from the central bank’s goals.
Powell, speaking for the first time since Trump last week paused some of the more stringent of his barrage of tariffs, also characterised the ensuing market volatility of recent weeks as a logical processing of the Trump administration’s dramatic shifts in trade policy, not a sign of stress that warranted a Fed response.
“For the time being, we are well-positioned to wait for greater clarity before considering any adjustments to our policy stance,” Powell said in a speech to the Economic Club of Chicago. In a later question-and-answer session, he noted a potentially tough situation developing in which prices are pushed higher by tariffs while growth and possibly the labour market weaken, leaving both inflation and employment further away from the Fed’s desired levels.
The Fed tries to keep inflation stable at 2 per cent while sustaining maximum employment.
“I do think we will be moving away from those goals, probably for the balance of this year. Or at least not making any progress,” due to the impact of tariffs that so far have proved larger than even the most severe scenarios in Fed planning estimates, Powell said.
He called Trump’s tariff plans “fundamental changes” that do not provide businesses and economists with any clear parallels to study. Powell said the US began the year around full employment and with inflation expected to continue falling to the Fed’s target, something many doubted it could accomplish.
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In his first public remarks on recent financial volatility, Powell said he felt bond and stock markets were functioning well, showing investors adapting to the new policy landscape.
Asked if there is a “Fed put” where the central bank would step in if markets plummet, Powell said “no”, while offering an explanation.
“Markets are struggling with a lot of uncertainty and that means volatility. But having said that, markets are functioning…They are orderly and they are functioning just about as you would expect them to function.”
US stocks, already down on the session before Powell spoke, extended their losses afterwards.
“I think people were expecting Powell to be neutral and he was hawkish instead,” Jim Carroll, senior wealth advisor at Ballast Rock Private Wealth in Charleston, South Carolina, said about the additional losses in stocks in response to Powell’s appearance. “When asked if there’s such a thing as a Fed put for the stock market, his answer was ‘no.’”
Heightened uncertainty
In a wide-ranging conversation, Powell also said the Fed was closely monitoring the outcome of a Supreme Court case about Trump’s firing of officials at independent agencies, but he did not think the outcome would apply to the Fed.
Powell said Fed independence was a matter of law that could only be altered by Congress and drew robust applause for pledging to ignore political influence and set monetary policy based on economics and “without consideration of political or any other extraneous factors”.
For now, though, it is the politics around tariffs that have left the Fed guessing. It remains uncertain where trade policy will ultimately settle, and the back and forth on its own is leaving businesses and individuals uncertain how to react and, Fed officials worry, may raise public expectations about future inflation.
US economic growth does appear to be slowing, he said, with consumer spending growing modestly, a rush of imports to avoid tariffs likely to weigh on estimates of gross domestic product, and sentiment souring.
“Despite heightened uncertainty and downside risks, the US economy is still in a solid position,” Powell said. But “the data in hand so far suggest that growth has slowed in the first quarter from last year’s solid pace”.
Economists see growth continuing to slow this year, while “households and businesses report a sharp decline in sentiment and elevated uncertainty about the outlook, largely reflecting trade policy concerns”, Powell said.
The Fed’s benchmark interest rate is currently 4.25 to 4.5 per cent, where it has been since December following several rate cuts late last year. Since then, progress on restoring inflation to the Fed’s 2 per cent target has slowed. The tariffs threaten to reverse some of those gains, with Fed officials focused on whether anticipated price increases will translate into persistent inflation requiring a monetary policy response.
A judgment about the likely impact will be central to the upcoming Fed debate over whether to leave the rates unchanged, lower them, or even consider rate increases.
“Tariffs are highly likely to generate at least a temporary rise in inflation. The inflationary effects could also be more persistent,” Powell said. “Avoiding that outcome will depend on the size of the effects, on how long it takes for them to pass through fully to prices, and, ultimately, on keeping longer-term inflation expectations well anchored,” an aim Fed officials have begun to emphasise.
While measures of inflation expectations over short-term periods “have moved up significantly” because of tariffs, Powell said the longer-term expectations more closely watched by the Fed remain consistent with its inflation goal. With policymakers also watching employment, Powell said the labour market remained “in solid condition” and “at or near maximum employment”.
But should the Fed get caught between rising inflation and a rising unemployment rate, “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”.
Financial markets are betting ever more heavily that when it comes down to it, the Fed will act to cushion a downturn in employment and end up cutting rates by a full percentage point by year-end. June is still seen as the start, but since he spoke, bets have really firmed up on that fourth rate cut by year-end. REUTERS
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