The Trump administration’s on-again, off-again tariffs on U.S. trading partners are putting the Federal Reserve in a tight spot, Chairman Jerome Powell said Wednesday in a speech in Chicago.
“We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension,” Powell said before the Economic Club of Chicago, referring to the central bank’s twin goals of maintaining high employment and price stability.
Powell warned that the tariffs, which have been temporarily paused for some countries while Chinese goods face up to 245 percent levies, were "significantly larger than anticipated” and will likely cause “higher inflation and slower growth.”
As a result, the Fed’s main tools come with drawbacks. Cutting benchmark rates from their current 4.25 - 4.5 percent level could stimulate economic growth, but it also might drive up inflation, which has been falling overall since it peaked in 2022.
Faced with those conditions, as well as pre-tariff data from March showing encouraging job growth and inflation slowing, Powell said the Fed would wait and see before making any major changes.
“As that great Chicagoan Ferris Bueller once noted, ‘Life moves pretty fast,’” Powell said. “For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance.”
In the meantime, U.S. stock markets have reacted with high volatility to the rapidly evolving trade war, which in recent days has involved China suspending rare earth mineral exports and the U.S. placing restrictions on the export of cutting-edge artificial intelligence chips to China.
During the Chicago speech, Powell dismissed the Federal Reserve immediately taking more aggressive actions in U.S. markets to stabilize prices, such as directly buying assets or providing liquidity, known as a “Fed put.”
“Markets are functioning... Conditional on being in such a challenging situation, markets are doing what they're supposed to do,” he said. “They're orderly and they're functioning just about as you would expect them to function."
All three major U.S. stock indices closed down on Wednesday.
Outside experts warn that the tariff chaos could harm U.S. credibility.
Jamie Dimon, the chief executive of JPMorgan Chase, told the Financial Times on Wednesday that economic uncertainty is challenging the U.S. reputation as a “haven” of democracy and prosperity.
“So you’re going to be reading about this nonstop until hopefully these tariffs and trade wars settle down and go away so people can say, I can rely on America,” he said.
“We should be careful. I don’t think anyone should assume they have a divine right to success and therefore don’t worry about it,” he continued.
