Federal Reserve Chair Jerome Powell has long worked toward guiding the economy to a “soft landing.” This effort intensified after inflation surged in 2022 due to pandemic stimulus and supply chain disruptions. To combat rising prices, the central bank raised interest rates. These actions have largely succeeded, as inflation has decreased to under 3%, nearing the Fed’s 2% target. However, the process isn’t over yet.
The next phase involved lowering the federal funds rate to its neutral level, estimated at 2.5%. The Fed began this in September. But, progress has slowed as consumer confidence drops and inflation remains persistent. Now, the economy stands at a pivotal moment. This follows President Donald Trump’s announcement of new tariffs on April 2, sparking a trade war. Investors eagerly awaited Powell’s comments, as he made his first public statement on the tariffs since they were introduced.
During his speech at a conference organized by the Society for Advancing Business Editing and Writing, Powell acknowledged the potential impact of these tariffs. He noted that various policy changes, including those on immigration and fiscal policy, are also influencing the economy. However, Powell’s main concern wasn’t whether tariffs would cause price hikes. Instead, he questioned how long these higher prices might last.
He stated, “Tariffs are likely to generate at least a temporary rise in inflation,” but he also warned that their effects could last longer. Powell emphasized the Fed’s responsibility to prevent this temporary price increase from becoming a long-term inflation issue. While it’s clear that tariffs can trigger a one-time rise in prices across many sectors, Powell expressed concern that they could lead to a broader inflationary cycle.
Such a cycle could occur if a global trade war escalates, forcing businesses to raise prices in response to higher costs. In 2022, the Fed made the mistake of assuming inflation was temporary. This time, Powell is determined not to make the same error. Although the job market remains strong, consumer confidence continues to slide. In March, the economy added 228,000 jobs, but economists expect the job market to weaken in the coming months.
Powell also highlighted the potential risks of higher inflation and rising unemployment. Although he didn’t directly use the term “stagflation,” he acknowledged the danger of these two factors occurring simultaneously. The Fed’s tools, mainly changes in interest rates, aren’t ideal for tackling both issues at once. Powell noted that the Fed would prioritize addressing whichever factor is further from its dual mandate of maintaining full employment and keeping inflation at 2%.
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