Federal Reserve Chairman Jerome Powell indicated that inflation driven by new trade tariffs might be “transitory,” evoking comparisons to the Fed’s 2022 misstep when it wrongly classified inflation as a short-lived phenomenon.
Speaking Wednesday following the Federal Open Market Committee’s decision to hold rates at 4.25%-4.50%, Powell said the Fed is not in hurry to adjust interest rates and policymakers can “wait for clarity” before making moves.
How Much Of Inflation Is Due to Tariffs?
The Fed’s updated macroeconomic projections show a slowing economy and stubbornly high inflation, raising concerns about stagflation. Growth forecasts for 2025 were revised downward, with real GDP now expected to expand 1.7%, down from December’s 2.1% estimate.
The Fed’s preferred measure, the Personal Consumption Expenditures price index, is now expected to hit 2.7% in 2025, up from 2.5%. Core PCE, which strips out food and energy costs, was revised from 2.5% to 2.8% for 2025.
Powell admitted it is “very challenging” to isolate tariff-driven inflation from broader price pressures.
“Some of it—a good part of it—is coming from tariffs,” he said. The difficulty lies in tracking which price increases are directly tied to tariffs and which are due to other economic factors.
Tariff-related inflation could be “transitory”, Powell said, depending on how quickly it moves through the economy. If inflation expectations remain anchored and the effects fade, the Fed may opt to look past these price increases.
Yet, some of its effects are already visible.
“We have had two very strong goods inflation readings in the last two months, which is very unexpected,” Powell said, suggesting that businesses may be preemptively raising prices in anticipation of tariffs.
A similar dynamic occurred when washing machines were tariffed in 2018—prices on both washers and dryers jumped, even though only one was subject to tariffs.
The Fed is also factoring in potential retaliatory tariffs from other countries. Staff forecasts assume “full retaliation,” though the exact economic impact remains uncertain.
Powell indicated that “when we actually know the specifics, we will be able to have a better-informed forecast.”
Powell Dismisses UMich Consumer Inflation Worries, Downplays Recession Fears
Recent surveys, including the University of Michigan Consumer Sentiment Index, indicate rising uncertainty among households and businesses, with inflation expectations soaring sharply as economic players anticipate tariffs.
Powell downplayed the University of Michigan report, calling it an “outlier” compared to other measures of long-term inflation expectations.
Despite rising inflation expectations, the Fed is still projecting two rate cuts in 2025. Powell said weaker growth and higher inflation are “balancing each other out,” leading policymakers to maintain their current stance.
“We think our policy is in a good place,” Powell said.
Powell said that while some forecasters have slightly raised the probability of a recession, the risk remains “moderate” and “not high.” He noted that while survey data from businesses and households show increased uncertainty, the hard economic data—such as GDP growth and employment—remains solid.
Market Reactions: Stocks Rally, Bitcoin Tops $85,000
Risk sentiment rippled through risky assets after Powell’s remarks on Wednesday.
The S&P 500 – as tracked by the SPDR S&P 500 ETF Trust SPY – rallied 1.4% going into the closing bell, while the tech-heavy Nasdaq 100, tracked by the Invesco QQQ Trust QQQ, soared 1.8%.
Small caps outperformed large-cap counterparts, with the iShares Russell 2000 ETF IWM up 2%.
Short-dated Treasury yields fell by 5 basis points to below 4% and the U.S. dollar index (DXY) trimmed session gains to 0.3%. Gold rose 0.5% to nearly $3,050 per ounce, further extending record highs.
Bitcoin BTC/USD soared 3.3% to above $85,000, hitting a 10-session high.
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Photo courtesy of the Federal Reserve.
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