During a recent speech at the Economic Club in Chicago, Federal Reserve Chairman Jerome Powell stated that the Fed will stick with its cautious approach to interest rates amid heightened uncertainty caused by President Trump’s tariff policies.
Powell said that the Fed is awaiting more data before making any changes on interest rates, while also warning that tariffs could refuel inflation and weaken economic growth, which could trap the Fed’s dual mandate of managing inflation, supporting growth and achieving maximum employment.
Powell’s comments on maintaining stability between inflation and growth have triggered volatility as businesses scramble to deal with these trade policy changes.
A Wait-and-See Approach to Monetary Policy
Powell signaled that the Federal Reserve is in no rush to alter its current policy stance, opting to wait for greater clarity on the economy’s trajectory. “For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance,” he said.
This cautious approach comes in the wake of President Trump’s recent pause on some of his more stringent tariff proposals, which had sparked significant market volatility. ⁽¹⁾
Powell described the market volatility of recent weeks as a logical processing of the Trump administration’s dramatic shifts in trade policy – not a sign of stress that warranted a Fed response.
Despite the Fed’s cautious stance, Powell said that tariffs could hurt the economy.
Additionally, he pointed out that Trump’s tariff proposals are significant shifts without a well-defined historical trajectory, making it challenging for businesses and economists to fully evaluate their implications.
The Fed is still working to collect additional data to evaluate the impact of these policies on growth, employment, and inflation. ⁽²⁾
The Fed’s Dual Mandate Threatened by Tariffs
The impact of tariffs is putting pressure on the Federal Reserve’s dual mandate, which is maintaining maximum employment and managing inflation at 2%.
Powell cautioned that tariffs could lead to a challenging scenario where inflation might increase and economic growth and the job market deteriorate, making both objectives much more difficult. ⁽³⁾
Tariffs on imports may increase costs and boost inflation. Although the Fed typically views tariff-induced price hikes as temporary, Powell cautioned that the structure of Trump’s tariffs may lead to more sustained inflationary pressures.
He said that both market-based and survey-based indicators of short-term inflation are already increasing, and that the Fed’s favorite inflation gauge, the PCE Index, is forecasted to reach 2.6% in March.
Powell will have to wait on how the tariffs will impact the economy. ⁽⁴⁾
Economic Growth Faces Pressure
Powell emphasized new risks to economic expansion, especially in 2025’s first quarter.
The January–March period is predicted to see little to no growth in the gross domestic product (GDP), which would be a significant deceleration from 2024’s steady pace.
According to the Atlanta Fed’s most recent estimate, Q1 GDP growth is only expected to be -0.1%, because of an extraordinary increase in gold imports and exports. GDP is also anticipated to be impacted by strong imports, which are the result of companies hurrying to stockpile goods in anticipation of possible tariffs. ⁽⁵⁾
Consumer spending, a key driver of economic activity, has grown only modestly despite robust motor vehicle sales. Powell noted that the Commerce Department’s recent report of a 1.4% increase in March retail sales—driven largely by car purchases ahead of tariffs—masks broader softness in consumer behavior. ⁽⁶⁾
Market Volatility and the Absence of a “Fed Put”
Recent market volatility, driven by uncertainty over Trump’s trade policies, has not caused the Fed to signal immediate action.
Powell dismissed the notion of a “Fed put”—a term that the central bank would intervene to support markets in the event of a sharp decline.
“Markets are struggling with a lot of uncertainty and that means volatility,” he said. “But having said that, markets are functioning…They’re orderly and they’re functioning just about as you would expect them to function.” ⁽⁷⁾
As Powell spoke, stocks hit session lows as Treasury yields turned lower, reflecting investor unease. Powell insisted that there are no indications of systemic stress as the bond and equity markets adjust to the new policy environment.
According to the CME Group’s FedWatch tool, market predictions indicate that the Fed will resume rate decreases in June 2025, with three or four quarter-point reductions expected by the end of the year. Powell, however, gave no direct indication of the Fed’s next move, reiterating the need for patience and data-driven decisions. ⁽⁸⁾
Balancing Inflation and Growth in a Tariff-Driven Economy
Powell mentioned the delicate balancing act the Fed faces in responding to tariff-driven economic pressures. If inflation rises, the Fed may need to keep interest rates steady or raise them to decrease demand.
Conversely, if growth slows significantly, rate cuts could be necessary to stimulate the economy. “We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension,” Powell said, noting that the Fed would assess the economy’s distance from each goal and the time needed to close those gaps. ⁽⁹⁾
It will be crucial for the Fed to maintain longer-term inflation expectations at 2%. Powell cautioned that depending on the impact of the tariffs and how fast they are reflected in consumer prices, their inflationary impacts may last.
Although the U.S. enters 2025 with inflation advancing toward the Fed’s objective and near-full employment, the imposition of tariffs has halted this progress and made monetary policy more difficult.
