‘Larger-than-expected’ tariffs mean higher inflation, slower growth: US Fed chief Powell
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The US faces a highly uncertain outlook with elevated risk of inflation, says Federal Reserve chairman Jerome Powell.
PHOTO: BLOOMBERG
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WASHINGTON - President Donald Trump’s new tariffs
“We face a highly uncertain outlook with elevated risks of both higher unemployment and higher inflation,” undermining both of the Fed’s mandates of 2 per cent inflation and maximum employment, Mr Powell told a business journalists’ conference in Arlington, Virginia, remarks that pointed to difficult decisions ahead for the US central bank and did nothing to staunch a global bloodletting in stock markets.
Mr Powell spoke as equity markets from Tokyo to London to New York continued a swoon
Investors had looked to Mr Powell’s speech for reassurance that perhaps the Fed was poised to take supportive actions as it has in previous moments of extreme market duress, and Mr Trump himself took to his social media platform to say now would be the “perfect time” for the Fed to cut interest rates.
But Mr Powell did not address the selloff directly, instead acknowledging that the Fed faced the same uncertainty engulfing investors and company executives.
The S&P 500 Index was down another nearly 6 per cent, with the Dow Jones Industrial Average 5.5 per cent lower and the Nasdaq off 5 per cent, ending a two-day decline that is the worst since the onset of the coronavirus pandemic in March 2020.
“Powell’s comments support our view that the Fed is not poised to rush in and cut interest rates anytime soon, despite President Trump’s call right ahead of Chair Powell’s comments to do so,” Nationwide Chief Economist Kathy Bostjancic said. “As such, we maintain our view the Fed waits until (the fourth quarter) to cut interest rates as the acceleration in inflation in the coming months makes them hesitant to lower rates to support the slowing economy.”
Mr Powell said the Fed has time to wait for more data to decide how monetary policy should respond, but the central bank’s focus will be on ensuring that inflation expectations remain anchored, particularly if Mr Trump’s import taxes touch off a more persistent jump in price pressures.
“While tariffs are highly likely to generate at least a temporary rise in inflation, it is also possible that the effects could be more persistent,” Mr Powell said. “Avoiding that outcome would depend on keeping longer-term inflation expectations well anchored, on the size of the effects, and on how long it takes for them to pass through fully to prices. Our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem,” he said.
Mr Powell said it was not the Fed’s role to comment on Mr Trump’s policies but rather to react to how they might affect an economy that he and his colleagues regarded just a few weeks ago as being in a “sweet spot” of falling inflation and low unemployment.
“Uncertainty is high,” Mr Powell said in response to a question from the event moderators. “What we’ve learned is that the tariffs are higher than anticipated, higher than almost all forecasters predicted.”
While it is unclear how it will play out, he said, “the same is likely to be true of the economic effects, which will include higher inflation and slower growth.”
Mr Powell’s comments highlighted the tension the Fed is seeing emerge between “hard data” that remains solid - the economy added 228,000 jobs
“We are closely watching this tension between the hard and soft data. As the new policies and their likely economic effects become clearer, we will have a better sense of their implications for the economy and for monetary policy,” Mr Powell said.
“We are well positioned to wait for greater clarity before considering any adjustments to our policy stance. It is too soon to say what will be the appropriate path for monetary policy.”
Push and pull
The confounding set of risks, with prices rising even as the economy weakens, has become increasingly central to recent Fed commentary as the scope of Mr Trump’s tariff plans become clear and other countries respond.
China has announced retaliatory tariffs of 34 per cent
Administration officials have so far downplayed the worst market sell-off since the onset of the Covid-19 pandemic as necessary for US economic gains in the future.
Retaliation by other countries, in this case one of the largest US trading partners and the wellspring of many trade grievances among US politicians of both political parties, is one of the channels Fed officials have said could cause Mr Trump’s import taxes to lead to more persistent inflation.
While short of classic “stagflation,” Fed Governor Adriana Kugler this week said “we’re already seeing some upside risks to inflation and some real increases in inflation ... We may be seeing down the road a little bit of a slowdown as well,” in the economy overall.
The push and pull expected between slower growth and rising prices could well keep the Fed on hold until it is clear which trend takes hold more forcefully.
Investors in contracts tied to the central bank’s policy rate appear to be expecting the risks to growth will dominate.
Markets now expect four quarter-percentage-point interest rate cuts from the Fed this year versus three before Trump’s announcement of tariffs that could tax imports an average of as much as 27 per cent by some estimates, versus about 2.5 per cent at the end of the Biden administration. REUTERS
