Powell sees greater risk to inflation, economic growth as a result of Trump's tariffs

WASHINGTON (TNND) — The Federal Reserve is facing an increasingly difficult economic environment to navigate as it tries to keep the economy on track and get inflation to return to normal levels after sweeping tariffs rolled out Wednesday, risking a global trade war and tremendous uncertainty about whether the soft landing can continue.

President Donald Trump unveiled his long-awaited “reciprocal” tariffs earlier this week, charging imports double-digit tariffs across the board with larger increases targeting other countries based on trade barriers and deficits the White House says were taking advantage of the U.S. and its companies.

The tariffs have sent Wall Street into a tailspin with the market posting its worst day of losses since the onset of the coronavirus pandemic and reigniting fears of an economic downturn because of higher prices most economists think will quickly be passed onto consumers.

The precarious situation has put the Fed in a tricky spot as it mulls how to adjust its benchmark interest rate that have been in a holding pattern of 4.25% to 4.5% since last year.

Fed officials had already scaled back expectations for progress being made on inflation and lowered forecasts for economic growth due to earlier tariff announcements and expectations for more to come. Fed chair Jerome Powell has said tariffs were already fueling price increases before Trump’s “reciprocal” tariffs took effect with more expected to come over the next several months.

Speaking at a conference on Friday, Powell said that “it is now becoming clear that the tariff increases will be significantly larger than expected,” and the economic fallout will also likely be higher than anticipated.

“While tariffs are highly likely to generate at least a temporary rise in inflation, it is also possible that the effects could be more persistent,” Powell said. “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.”

Navigating the economy into a soft landing, where inflation returns to 2% without a recession due to higher interest rates, was already a challenging proposition for the central bank to achieve. That challenge has gotten even tougher as it awaits more data on the impact tariffs have on the economy.

“The level of overall risk in the economic system now has been elevated because of how poorly and how aggressively the tariffs policy has been put in place,” said Mark Williams, a finance lecturer at Boston University’s Questrom School of Business and former bank examiner at the Fed. “The Fed still has a tool of interest rates to be able to fight inflation. It looks like inflation could hit 3 to almost 4% by year end, based on where these tariffs are moving, so that almost puts the Fed back in a corner.”

Trump has repeatedly pushed the Fed to cut its interest rates even before his tariffs started going into effect to provide a boost to the economy. He renewed that call on Friday, directly saying Powell needs to cut rates.

“This would be a PERFECT time for Fed Chairman Jerome Powell to cut Interest Rates. He is always ‘late,’ but he could now change his image, and quickly,” Trump said on Truth Social. “CUT INTEREST RATES, JEROME, AND STOP PLAYING POLITICS!”

But the Fed has leaned heavily into its wait-and-see approach as the effects of the administration’s trade policies work through the economy. Economists are concerned the economy will slow as a result of the tariffs amid higher prices and uncertainties about its strength.

Concerns about inflation moving higher while the economy is weakening puts the Fed in a tricky spot to navigate. Lowering rates could help keep growth on track and give consumers and businesses more wiggle room to borrow money but could also help push prices upward.

“They could fight inflation, but then that's going to not allow for economic stability, and it could actually even help push the economy into recession sooner. This could require the Fed to reduce rates coming up to this next meeting, just to try to give the economy a little bit of help,” Williams said.

Powell said Friday that the Fed is still not in a rush to cut interest rates despite the huge shifts in U.S. trade policy that were rolled out this week, sending stock markets into a tailspin.

“It's just too soon to say what the appropriate monetary policy response will be to these new policies,” he said. “We've taken a step back and we're watching to see what the policies turn out to be and the ways in which they will affect the economy, and then we'll be able to act.”