Jerome Powell, the Chair of the Federal Reserve, expressed his concerns regarding a potential policy dilemma the central bank could face between controlling inflation and supporting economic growth. In a recent speech that mirrored one he delivered earlier in Virginia, Powell underscored the challenges posed by tariffs and their impact on inflation and economic expansion.
Powell emphasized that tariffs are “highly likely to generate at least a temporary rise in inflation.” He warned that the impacts of such actions could make it much harder to achieve the Fed’s goals. “Tariffs are likely to move us further away from our goals… probably for the balance of this year,” he stated.
The Federal Reserve has continuously walked that balance between protecting threats to economic growth while ensuring that inflation continues to be controlled. Powell acknowledged that the current economic landscape presents a dual-mandate challenge, saying, “We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension.” This causes concern to many that the Fed will be forced into an interest rate cut. This is a major worry given the potential for future economic downturns.
The markets are understandably jittery about these new economic data points. As a result, many have pushed out expectations for when the Federal Reserve will first cut rates back to June. The CME Group’s FedWatch gauge is pointing to an interesting opening. It forecasts that the Fed will do three or four quarter-percentage-point cuts by the end of 2025.
Even looking ahead at the expected growth slowdown, Powell seemed highly confident that the economy is in a strong and healthy place. Further, he emphasized that at least today, our economy is in a “very solid position.” According to the most recent numbers out from the Commerce Department, retail sales are up an astounding 1.4% in March. That’s showing remarkable resilience in consumer spending.
These indicators help explain the Atlanta Fed’s nowcast predicting a sharp decline in GDP growth. They now project a -0.1% pace for the first quarter, taking into account a big, somewhat anomalous surge in gold imports and exports. This shines a light on the double-edged sword that swords policymakers as they try to sword fight through this complex and variable economic landscape.
Powell pointed out that both survey and market measures of near-term inflation expectations are increasing. Don’t worry, he told us—the longer-term forecast remains anchored around the Fed’s 2% inflation target. The Federal Reserve’s most important inflation gauge, the core PCE, is expected to reach 2.6% for March. That does underscore the important point that we need to get inflation expectations really well anchored.
If that happens, we’ll determine how much the economy is short of each goal. Finally, we’ll look at the varying lengths of time projected to close those gaps. So how might the Fed change policy, if it needs to? Powell gave more detail on how he thinks about any changes.
With that confirmation, producers can be sure that the Fed is on board with a wait-and-see approach. They are looking for greater certainty around economic trends before committing to any pivot in policy direction. “For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance,” he concluded.
Economic indicators are wildly fluctuating. With current trade wars swinging both with China and the EU, stakeholders are especially focused on what the Federal Reserve will do on interest rate adjustments and inflation control measures and the trends they’re making.
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