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On Wednesday, Federal Reserve Chair Jerome Powell alerted the public to the potential difficulties the central bank might face in balancing rising inflation with an economy that is slowing down, a situation that could stem from the tariffs imposed during President Trump’s administration.
In remarks delivered at the Economic Club of Chicago, Powell emphasized that the tariffs instituted by the Trump administration were “significantly larger than anticipated.” He added, “The same is likely to be true of the economic effects, which will include higher inflation and slower growth.”
Despite these challenges, Powell noted that the Federal Reserve is in a position to be patient and monitor the consequences of tariffs and other economic policies before making any adjustments to interest rates. The recent market fluctuations following Mr. Trump’s initial announcement of significant tariffs on April 2, which were largely put on hold a week later, have fueled speculation regarding possible interest rate cuts or other measures to stabilize investor sentiment.
“For the time being, we are well positioned to wait for greater clarity” regarding the ramifications of policy shifts in areas like immigration, taxation, regulation, and tariffs, Powell stated.
The chair projected that inflation might be temporary, but could also prove to be more persistent. This view aligns with concerns raised by the majority of the Federal Reserve’s 19-member interest rate-setting committee during their previous meeting.
Economists have adjusted their growth forecasts downward in light of Mr. Trump’s tariffs, anticipating higher inflation rates this year. Since tariffs function as taxes imposed on importers, such as Walmart, it is typical for these costs to be passed on to consumers through increased prices.
Scott Helfstein, head of investment strategy at Global X, remarked via email, “Tariffs likely lead to higher prices while softening consumer sentiment and business optimism possibly means slower growth. This is going to make economic forecasting more difficult, and the Fed is likely going to widen their bands growth and rates with risks to both price stability and full employment rising.”
The Federal Reserve’s interest rate-setting committee has shown some divisions regarding these issues. Recently, Fed governor Christopher Waller indicated that he believes the effects of a substantial increase in tariffs would likely be temporary, even if they remain in place for an extended period. However, he acknowledged that such high tariffs could pressure the economy and potentially lead to a recession.
Waller mentioned that if the economy were to experience a significant slowdown, even amidst elevated inflation, he would advocate for cutting interest rates “sooner, and to a greater extent than I had previously thought.”
Conversely, some Fed officials, including Neel Kashkari, president of the Minneapolis Fed, express a stronger concern regarding the inflationary impacts of the tariffs, suggesting they may be less inclined to favor rate cuts in the near future.
At present, recent economic indicators suggest that the economy remains robust. Employment numbers have shown strength and inflation decreased in March. However, significant dips in consumer and business confidence have economists worried about possible declines in spending and business investment.
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