Jerome H. Powell, the chair of the Federal Reserve, warned that President Trump’s tariffs risk stoking even higher inflation and slower growth than initially expected, as he struck a more downbeat tone about the outlook, despite the economy so far remaining in a “good place.”
“While uncertainty remains elevated, it is now becoming clear that the tariff increases will be significantly larger than expected,” he said. “The same is likely to be true of the economic effects, which will include higher inflation and slower growth.”
Mr. Powell characterized the risks of that outcome, which he warned could include higher unemployment, as “elevated.”
“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,” he said in a speech at a conference in Arlington, Va., on Friday.
“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,” he said. Higher inflation stemming from tariffs could show up “in the coming quarters,” he said.
Mr. Powell added that the Fed’s “obligation” was to ensure that a “one-time increase in the price level does not become an ongoing inflation problem.”
His comments cap off a tumultuous week after Mr. Trump jolted the world with shock-and-awe tariffs that risk setting off an inflation surge and a sharp economic downturn. Financial markets across the globe have tumbled as the reality of the president’s plans begin to set in.
The rout continued on Friday, with the S&P 500 down around 4 percent, following China’s decision to retaliate with 34 percent tariffs on U.S. goods and comments from Mr. Trump and his economic advisers seeking to dismiss the potential economic pain.
Minutes before Mr. Powell’s speech, the president went on Truth Social and called on the Fed chair to lower interest rates as he attacked him for being “always ‘late.’”
“This would be a PERFECT time for Fed Chairman Jerome Powell to cut Interest Rates. He is always “late,” but he could now change his image, and quickly,” Mr. Trump wrote. “CUT INTEREST RATES, JEROME, AND STOP PLAYING POLITICS!”
In a moderated discussion after his speech, Mr. Powell acknowledged that the combination of higher unemployment and higher inflation would be “difficult” for the Fed to navigate given its dual goals of fostering a healthy labor market and low, stable inflation.
“If we find ourselves in that situation, we look at how far each of the two variables is from its goal, and we ask ourselves, ‘How long would it take to get back?’ And we weigh those things and make a decision about what to do,” he said. Mr. Powell added that the two goals were not in “tension” right now.
He also stressed that the Fed was “strictly nonpolitical.”
“We try to stay as far as we can from the political process,” he said. People “expect us to tell the truth, and that’s what we’re going to do.”
The magnitude of the global trade war that is brewing creates complications for the Fed, which has been trying since the pandemic to bring inflation back down to its 2 percent target while avoiding a recession. Just a couple of months ago, the prospects of this so-called “soft landing” looked bright, aided by the Fed’s decision in the second half of the year to lower interest rates by a percentage point.
Now, Fed officials are confronting a much thornier set of issues that have upended expectations about when the central bank might be able to lower interest rates again after it paused cuts in January. Two distinct camps have emerged — some see the Fed holding off on rate cuts for the whole year, while others see them moving more aggressively, and potentially earlier, than initially expected.
Fed officials have long maintained that they can be patient about monetary policy decisions because the economy is in a good place. March’s unexpectedly strong jobs report, which showed employers adding 228,000 new positions, reinforced the Fed’s approach but did little to allay concerns about the economic damage potentially coming down the pipeline.
On Friday, Mr. Powell said it was “too soon to say what will be the appropriate path for monetary policy,” but reiterated that the central bank was “well positioned to deal with the risks and uncertainties we face as we gain a better understanding of the policy changes and their likely effects on the economy.”
“We’ve taken a step back and we’re watching to see what the policies turn out to be and the ways in which they will affect the economy, and then we’ll be able to act,” Mr. Powell said during the discussion.
That approach echoes comments from the Fed’s vice chair, Philip Jefferson, and a governor, Lisa Cook, on Thursday.
“In my view, there is no need to be in a hurry to make further policy rate adjustments,” Mr. Jefferson said in a speech.
Ms. Cook said the Fed can “afford to be patient but attentive” even as she added that she placed “more weight on scenarios where risks are skewed to the upside for inflation and to the downside for growth.”
That combination “could pose challenges for monetary policy,” she said.
