Federal Reserve Chairman Jerome Powell expressed concern in a speech Wednesday that central banks can find themselves in the dilemma between controlling inflation and supporting economic growth.
With increasing uncertainty about the impact of President Donald Trump’s tariffs, central bank leaders have said they are looking forward to higher inflation and reduced growth, but it is unclear where the Fed needs to focus on a greater focus.
“We may find ourselves in a challenging scenario where the goals of dual mandart are tense,” Powell said in a statement prepared in front of the Chicago economic club. “If that happens, we consider how far the economy is from each target, and the potentially different time horizons that each gap is expected to close.”
The Fed is tasked with ensuring stable prices and full employment, and economists, including those with the Fed, see the threat to both taxation. Tariffs essentially serve as taxes on imports, but historically there has been a flat link to inflation.
In a session of questions and answers after the speech, Powell said that tariffs “are likely to further alienate us from our goals… perhaps for the balance this year.”
Powell gave no indication of where interest rates were heading, but said, “for the time being, we are well positioned to wait for more clarity before considering adjusting our policy stance.”
While Powell spoke, stocks hit a decline in session, but Treasury yields fell.
For higher inflation, the Fed will increase them to stabilize interest rates or attenuate demand. If growth is slow, the Fed could be persuaded to lower interest rates. Powell emphasized the importance of suppressing inflation expectations.
According to CME Group’s FedWatch gauge, the market will start again cutting interest rates in June, hoping to enact three or quarter-point reductions by the end of 2025.
Fed officials generally think that tariffs are a one-off hit of prices, but the vast nature of Trump’s obligations could change that trend.
Powell noted that the long-term outlook remains close to the Fed’s 2% target, but that research and market-based measures for short-term inflation are on the rise. The Fed’s main inflation measures are expected to represent a 2.6% percentage in March, he said.
“Taxes are very likely to generate at least a temporary increase in inflation,” Powell said. “The inflation effect could also be more sustained. The outcome depends on the size of the effect, the time it takes to fully pass through the price, and ultimately, a good fix for long-term inflation expectations.”
The speech was largely similar to what he delivered in Virginia earlier this month and what he delivered verbatim in several aisles.
Powell focused on the threats to growth and inflation.
First quarter GDP reported later this month is expected to have little growth in the US economy from January to March.
In fact, Powell said, “So far, it suggests that growth has slowed down in the first quarter from a solid pace last year. Despite strong car sales, overall consumer spending appears to be modest. Furthermore, strong imports during the first quarter are expected to consider GDP growth, reflecting the company’s efforts to preempt potential tariffs.”
Earlier in the day, the Commerce Department reported that retail sales had risen 1.4% more than expected in March. The report showed that the majority of the growth came from car buyers looking to make a purchase before the tariffs, while several other sectors also showed solid profits.
Following the report, the Atlanta Fed said it expects GDP to grow at a rate of -0.1% in the first quarter in adjusting for an unusual increase in gold imports and exports. Powell explained that despite the expected slowdown in growth, the economy is in a “solid position.”
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