Jerome H. Powell, the Chair of the Federal Reserve, made it clear that the central bank is keeping a close eye on the overall impact of President Trump’s broad economic policies. Despite the uncertainty surrounding which policies will actually be put into place, Powell emphasized that there is no rush to adjust interest rates just yet.
Speaking at an event on Friday, Powell noted, “As we sift through new information, our focus is on distinguishing the meaningful signals from the background noise as we shape our outlook. We have the luxury of waiting for clearer signals before moving forward.”
Powell further commented that if inflation persists while the economy remains robust, the Federal Reserve might opt to sustain its current restrictive policies longer. However, if the labor market weakens unexpectedly or inflation drops sharply, the Fed is prepared to respond by easing policy measures.
These remarks highlight the Fed’s careful balancing act as it maneuvers through a complex economic landscape.
In a separate conversation on Friday, Austan D. Goolsbee, president of the Chicago Fed and a voting member on this year’s policy-setting committee, expressed concerns about a scenario where inflation remains high but economic growth falters. According to Goolsbee, such a situation could present a significant challenge for the Fed, one that is becoming increasingly evident given the policies being pursued by the Trump administration.
He pointed out the impact of tariffs on intermediate goods, emphasizing that these levies could act as negative supply shocks. This means they might simultaneously reduce employment and push prices up, creating a “stagflationary impulse.” Goolsbee admitted, “There isn’t a generic answer to what to do in such situations.”
Earlier on Friday, Michelle Bowman, a Fed governor, indicated that as inflation aligns more closely with the central bank’s 2 percent target, factors such as the labor market and overall economic activity would play larger roles in policy discussions.
As per expectations, the Fed is likely to keep interest rates steady between 4.25 percent and 4.5 percent at their upcoming meeting on March 18-19, maintaining the pause initiated in January. However, future decisions might become more complex, particularly if the economy weakens and price pressures intensify.
The full impact of Trump’s tariffs remains uncertain. The president recently backtracked on some tariffs placed on Mexico and Canada, offering only short-term relief, while still threatening broader tariffs and penalties on products like aluminum and steel. The economic repercussions will hinge on the duration of these measures, how other nations respond, and how businesses and consumers adapt to rising costs.
On top of the tariffs, the Fed is weighing other Trump administration policies, such as mass deportations and major cuts to government spending, which are expected to slow down growth. Meanwhile, aspects like tax cuts and deregulation could help spur business activity, although it’s unclear to what degree.
Despite these uncertainties, the Fed takes some comfort knowing that the economy inherited by Trump has a strong foundation. New data released on Friday shows hiring remained steady in February, with the unemployment rate inching up to 4.1 percent. This resilience suggests that only a significant shock would likely push the economy into recession.
Nonetheless, the volatile environment has already raised concerns about the economic outlook, with consumer sentiment indicators showing a marked downturn in confidence. Economists have adjusted their growth forecasts accordingly, prompting policymakers to take notice.
Goolsbee noted that while the broader picture seems fairly strong, he’s hearing more from companies in his district about an “uncertainty-induced chill,” particularly affecting business investment.
Christopher J. Waller, a Fed governor, pointed out that recent sentiment measures indicate that the economic realties may not be as rosy as they appear. Nevertheless, Powell tried to be optimistic on Friday, stating that “despite high uncertainty levels, the U.S. economy is in a good position.” He also noted that sentiment data hasn’t been a reliable predictor of consumption growth in recent years.
As inflation fears grow among Americans, the Fed’s role is increasingly challenging. Having missed the inflation surge during the pandemic, the Fed is determined not to repeat that mistake. Since Trump’s reelection, central bank officials have raised their inflation forecasts, in part linking them to the president’s policies.
Powell mentioned that consumers tend to cite tariffs as a key factor behind their inflation expectations, even though longer-term indicators of inflation remain stable. During a discussion following his speech, Powell suggested that while tariffs could affect prices, the Fed’s policy reaction would depend on whether these are isolated incidents or part of a larger series of economic shocks.
Goolsbee voiced concerns over frequent trade policy changes, questioning whether these represent one-time cost shocks. John C. Williams, president of the New York Fed and a strong supporter of Powell, predicted tariffs would lead to higher inflation as these costs are passed on to consumers.
Even Waller, who had previously suggested the Fed could overlook tariff effects, conceded on Thursday that the impact could be more significant than expected.
The Fed’s latest Beige Book, which surveys economic conditions nationwide, indicated businesses are bracing for similar challenges. Most respondents across the 12 Federal Reserve districts plan to increase prices due to tariffs, with some already doing so in anticipation.
Amid these developments, Fed officials are unified in holding off on rate cuts until more definitive evidence shows inflation decreasing towards their target or if the labor market weakens unexpectedly. The financial markets are betting that these conditions might be met by June, potentially allowing the Fed to cut rates by 0.75 percentage points this year.
