Federal Reserve Chairman Jerome Powell sounded the alarm on Friday about the tariffs approved by US President Donald Trump. In a speech outside Washington, he said their economic effects will be"significantly greater" than expected and will translate into lower growth and higher inflation. Powell did not comment on the implications for the direction of monetary policy, claiming it was"too early to tell." But there is little evidence of a move at the next meeting on May 7."It looks like we don't need to rush," he said at one point, and that it is"time to wait and see," at another."We are waiting for clarification as to what our policy should be," he insisted.
“We have emphasized that it will be very difficult to assess the potential economic effects of higher tariffs until there is greater certainty about the details, such as what will be taxed, at what level and for how long, and the extent of retaliation by our trading partners. While uncertainty remains high, it is now becoming clear that tariff increases will be significantly larger than expected. The same is true of the economic effects, which will include higher inflation and slower growth,” he said in his clearest warning to date about the risks of Trump’s economic policy.
This was the central bank chairman's first intervention following Trump's decision to impose minimum tariffs of 10% on most countries, with higher rates on those with which the United States maintains a more unbalanced trade balance. Until now, he had avoided commenting, claiming that the specific measures to be adopted were unknown. Powell, however, remained cautious:"The extent and duration of these effects remain uncertain." After the Federal Reserve's last monetary policy meeting, he indicated that he expected the inflationary effects of the tariffs to be temporary, but this Friday he emphasized that he would act if that were not the case.
“While it is highly likely that tariffs will generate at least a temporary increase in inflation, it is also possible that the effects will be more persistent. Avoiding that outcome would depend on keeping long-term inflation expectations well-anchored, the extent of the effects, and the time it takes for them to fully impact prices. Our obligation is to keep long-term inflation expectations well-anchored and ensure that a one-time increase in the price level does not become a permanent inflation problem,” he explained.
Shortly before his speech, Trump launched into pressure on Powell via Truth, his social media platform, to lower interest rates. “This would be a PERFECT time for Federal Reserve Chairman Jerome Powell to cut interest rates. He’s always ‘late,’ but now he could change his image, and quickly,” he wrote. “LOWER INTEREST RATES, JEROME, AND STOP PLAYING POLITICS!” he added.
Powell declined to answer. He made it clear that politics isn't his thing, that he doesn't have to weigh in on trade or fiscal policy, as those decisions are for others."We're strictly apolitical," he stated. The Republican Party's color is red and the Democratic Party's is blue, so purple is used to represent a position of political neutrality."I like purple ties," he joked, pointing to the one he was wearing at the time."We try to stay as far away from the political process as possible," he asserted.
Trump's tariffs complicate the Federal Reserve's two goals: full employment and price stability. Powell is thus facing turbulence at a time when he was trying to complete the soft landing of the US economy, that is, reduce inflation to 2% without job losses or a recession. The central bank chairman acknowledged in questions after his speech that private analysts now see a greater risk of a recession in the United States, but that is still not the central scenario he envisions.
Powell's intervention comes after a much better-than-analysts March jobs report. The world's largest economy added 228,000 jobs, compared to forecasts for less than 150,000. In any case, that figure is now in the rearview mirror as concerns grow that the economy could enter a recession over the next year.
The next meeting of the Federal Reserve's Open Market Committee is on May 6 and 7. Until very recently, investors assumed that interest rates would remain unchanged at that meeting. Then, given the economic slowdown, betting seemed divided, but Powell's remarks once again dilute the chances of a rate cut in May. The implied probabilities in federal funds futures quotes are 70% that the Fed will keep rates at 4.25-4.50% and 30% that it will cut them by a quarter of a percentage point.
