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Federal Reserve Chair Cautions on Inflation and Growth Concerns

During a recent address to the Economic Club of Chicago, Federal Reserve Chair Jerome Powell raised alarms about the potential conflict facing the central bank between curbing inflation and fostering economic growth.

Powell’s remarks come amid heightened uncertainty regarding the implications of President Donald Trump’s tariffs. He indicated that while he anticipates an uptick in inflation and a downturn in growth, the Fed’s focus remains uncertain. He stated, “We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension.” He elaborated on the approach the Fed would take if this tension arises, emphasizing that they would assess how far the economy is from each goal and the different timeframes in which those gaps might be addressed.

The Federal Reserve’s responsibilities include maintaining stable prices and full employment. Economists, including those within the Fed, acknowledge that tariffs pose risks to both objectives. Tariffs function similarly to taxes on imports, although their historical correlation with inflation has varied.

In a follow-up session after his speech, Powell expressed his belief that the tariffs could hinder the Fed’s goals, stating, “likely to move us further away from our goals… probably for the balance of this year.”

While Powell did not provide specific guidance on future interest rate movements, he mentioned that the Fed is currently well-positioned to await further clarity before making any policy adjustments. Following his comments, stock markets dropped to new session lows, and Treasury yields declined.

If inflation rises, the Fed may hold rates steady or increase them to temper demand. Conversely, should growth falter, a reduction in interest rates could be considered. Powell underscored the critical nature of managing inflation expectations amidst these challenges.

Market analysts foresee the Fed potentially beginning to cut rates in June, with expectations of three or four quarter-percentage-point reductions by the end of 2025, as indicated by the CME Group’s FedWatch tool.

Generally, Fed officials regard tariffs as a one-time shock to prices, yet the extensive scope of the Trump administration’s tariffs may challenge that notion. Powell highlighted that both survey-based and market indicators show a rising trend in near-term inflation, although the long-term outlook is projected to be near the Fed’s 2% target. The Fed’s preferred inflation measure is estimated to indicate a rate of 2.6% for March.

“Tariffs are highly likely to generate at least a temporary rise in inflation,” Powell noted. He continued, “The inflationary effects could also be more persistent. Avoiding that outcome will depend on the size of the effects, how long it takes for them to fully pass through to prices, and ultimately, on keeping longer-term inflation expectations well anchored.”

His speech echoed sentiments from an earlier address in Virginia and exhibited similar phrasing on several critical points. Powell also underscored the potential threats to economic growth along with rising inflation risks.

Looking ahead, the Gross Domestic Product (GDP) figures for the first quarter are anticipated to reveal minimal growth in the U.S. economy for the January to March timeframe. Powell remarked, “The data in hand so far suggest that growth has slowed in the first quarter from last year’s solid pace.” Despite strong car sales, he noted that overall consumer spending appears to have increased only modestly.

Strong imports in the first quarter, a reflection of businesses attempting to pre-empt potential tariffs, are also expected to impact GDP growth negatively. Earlier that day, the Commerce Department reported a surprisingly robust retail sales increase of 1.4% in March, driven significantly by car purchases ahead of the impending tariffs, along with gains in other sectors.

Following the retail sales report, the Atlanta Fed projected GDP growth at a -0.1% rate for Q1 when factoring in an unusual surge in gold imports and exports. Still, Powell described the economy as being in a “solid position,” despite the anticipated slowdown.

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