Fed's Powell says larger-than-expected tariffs likely to boost inflation, slow growth

“Our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem,” he said.

Powell said it was not the Fed’s role to comment on Trump’s policies but rather to react to how they might affect an economy that he and his colleagues regarded just a few weeks ago as being in a “sweet spot” of falling inflation and low unemployment.

“Uncertainty is high,” Powell said in response to a question from the event moderators. “What we’ve learned is that the tariffs are higher than anticipated, higher than almost all forecasters predicted.”

While it is unclear how it will play out, he said, “the same is likely to be true of the economic effects, which will include higher inflation and slower growth.”

Powell’s comments highlighted the tension the Fed is seeing emerge between “hard data” that remains solid – the economy added 228,000 jobs in March with a 4.2% unemployment rate – and “soft data” like surveys and interviews with business contacts that point to a coming slowdown.

“We are closely watching this tension between the hard and soft data. As the new policies and their likely economic effects become clearer, we will have a better sense of their implications for the economy and for monetary policy,” Powell said.

“We are well positioned to wait for greater clarity before considering any adjustments to our policy stance. It is too soon to say what will be the appropriate path for monetary policy.”

PUSH AND PULL

The confounding set of risks, with prices rising even as the economy appears set to weaken, has become increasingly central to Fed commentary as the scope of Trump’s tariff plans become clear and other countries respond.

China has announced retaliatory tariffs of 34% on all U.S. goods, restrictions on the export of minerals critical to the tech industry, and other measures including limits on imports of U.S.-raised chickens – a nod to Trump’s support in rural, agricultural parts of the country.

Administration officials have so far downplayed the market sell-off, the worst since the onset of the COVID-19 pandemic, as necessary for U.S. economic gains in the future.

Retaliation by other countries like China, one of the largest U.S. trading partners and the wellspring of many trade grievances among U.S. politicians of both political parties, is one of the channels Fed officials have said could cause Trump’s import taxes to lead to more persistent price pressures.

The push and pull expected between slower growth and rising prices could well keep the Fed on hold until it is clear which trend takes hold more forcefully.

Investors in contracts tied to the central bank’s policy rate appear to be expecting the risks to growth will dominate.

Markets now expect four quarter-percentage-point interest rate cuts from the Fed this year versus three before Trump’s announcement of tariffs that could tax imports an average of as much as 27% by some estimates, versus about 2.5% at the end of the Biden administration.

(Reporting by Howard Schneider; Editing by Paul Simao and Andrea Ricci)