Powell Says Fed Can Wait to Adjust Rates, Sees Tariff Risks
Federal Reserve Chair Jerome Powell said officials are not in a hurry to adjust interest rates, adding tariffs could lead to higher inflation and unemployment.
“If the large increases in tariffs that have been announced are sustained, they’re likely to generate a rise in inflation, a slowdown in economic growth and an increase in unemployment,” Powell said Wednesday at the conclusion of a two-day meeting in Washington.
“The effects on inflation could be short lived, reflecting a one time shift in the price level,” he said. But it’s “also possible that the inflationary effects could instead be more persistent.”
Officials voted unanimously to keep the benchmark federal funds rate in a range of 4.25% to 4.5%, where it has been since December. In a statement, policymakers said they see a growing risk of both higher inflation and rising unemployment.
“Uncertainty about the economic outlook has increased further,” the Federal Open Market Committee said in a statement. They added, “the risks of higher unemployment and higher inflation have risen.”
President Donald Trump‘s trade policy has unleashed a wave of uncertainty across the economy. While the levies are still being negotiated, economists widely expect the expansive tariffs to boost inflation and weigh on growth. That would pit policymakers’ two goals - price stability and maximum employment - against one another.
With unemployment still low and demand steady, Fed officials have said they are comfortable keeping rates unchanged until they have a better understanding of where the economy is headed. Powell repeated that sentiment Wednesday, adding the cost to waiting is fairly low.
“We think we’re in the right place to wait and see how things evolve,” Powell said. “We don’t feel like we need to be in a hurry. We feel like it’s appropriate to be patient.”
Trump, however, has repeatedly said the central bank should lower borrowing costs now.
Powell and his colleagues are determined to keep tariffs from sparking a lasting rise in inflation, and several officials have signaled they would not support lowering interest rates preemptively to protect against a slowing economy.
“It’s not a situation where we can be preemptive, because we actually don’t know what the right response to to the data will be until we see more data,” Powell said Wednesday.
Economic Picture
Recession concerns have grown, and some businesses have reported pausing investment decisions given the uncertainty. Still, the labor market remains resilient, with employers adding 177,000 jobs in April. Fed officials described labor market conditions as “solid,” according to the statement.
Economists say it will take time for the full effect of the new tariffs to work through the economy. So far, the impact has mainly included a sharp decline in sentiment and a surge in imports. The US economy contracted at the start of the year for the first time since 2022, but a gauge of underlying demand stayed firm.
“Although swings in net exports have affected the data, recent indicators suggest that economic activity has continued to expand at a solid pace,” the statement said.
Companies scrambled in the first quarter to import merchandise ahead of the tariffs, and a surge in consumer spending in March suggested households also sought to frontload purchases. Key inflation gauges cooled in the month.
Source: Bloomberg
