Arlington (US): The Trump administration’s expansive new tariffs will likely lead to higher inflation and slower growth, and the Federal Reserve will focus on keeping price increases temporary, Fed Chair Jerome Powell said Friday.
Powell said in written remarks that the tariffs, and their impacts on the economy and inflation, are “significantly larger than expected”. He also said that the import taxes are “highly likely” to lead to “at least a temporary rise in inflation,” but added that “it is also possible that the effects could be more persistent”.
“Our obligation is to … make certain that a one-time increase in the price level does not become an ongoing inflation problem,” Powell said in remarks being delivered in Arlington, Virginia.
Powell’s focus on inflation suggests that the Fed will likely keep its benchmark interest rate unchanged at about 4.3% in the coming months. That is likely to disappoint Wall Street investors, who now expect five interest rate cuts this year, a number that has increased since President Donald Trump announced the tariffs Wednesday.
Economists forecast that the tariffs will weaken the economy, possibly threaten hiring, and push up prices. In that scenario, the Fed could cut rates to bolster the economy, or it could keep rates unchanged – or even hike them – to combat inflation. Powell’s comments suggest the Fed will mostly focus on inflation.
Powell’s remarks come two days after Trump unveiled sweeping tariffs that have upended the global economy, prompted retaliatory moves by China, and sent stock prices in the US and overseas plunging.
Weaker growth and higher prices are a tricky combination for the Fed. Typically the central bank would reduce its key interest rate to lower borrowing costs and spur the economy in the event of slower growth, while it would raise rates – or keep them elevated – to slow spending and combat inflation.
“The Fed is in a tough spot with inflation set to accelerate and the economy poised to slow,” said Kathy Bostjancic, chief economist at Nationwide.
Some positive news arrived Friday when the government reported that hiring accelerated in March, with 228,000 jobs added, though the unemployment rate ticked up to 4.2%, from 4.1%.
Yet those figures measure hiring in mid-March, before the scope of the duties became clear. The tariffs have also raised uncertainty about how the economy will fare in the coming months, which could limit businesses’ willingness to invest and hire.
AP
