Federal Reserve Chair Powell warns: the Trump administration's tariff policy may result in inflation and economic growth difficulties

On April 16, 2025, Federal Reserve Chairman Jerome Powell warned about the Trump administration's high tariff policy at the Chicago Economic Club, stating that it could lead to rising inflation and slowing economic growth, challenging the Fed's goals of maintaining price stability and promoting employment. Powell pointed out that if both inflation and unemployment rates rise simultaneously, the Fed will face difficult policy choices and may need to choose between raising and lowering interest rates. These remarks led to a drop in U.S. stocks, as the market expressed concerns over policy uncertainty.

Economic Uncertainty Triggered by Tariff Policy

In his speech, Powell noted that the tariff levels recently announced by the Trump administration are "significantly higher than expected," and their economic impact may also exceed initial estimates. He stated, "These policy changes are still evolving, and we will continue to update our assessment of their economic impact." Currently, the total tariff rate imposed by the U.S. on China has reached 145%, with import tariffs ranging from 10% to 50% on other trading partners.

According to the Federal Reserve's observations, these tariff measures have already impacted business and household confidence. Powell pointed out that recent surveys show a significant increase in uncertainty about future economic prospects among businesses and consumers, with many respondents attributing the cause to trade policy. This uncertainty has led to more conservative business investment and consumer spending.

Inflation Pressure Rises, Long-term Expectations Stay Stable

Powell stated that tariffs are "very likely" to cause short-term inflation to rise, adding, "Their inflationary effects may also be more persistent." He noted that the key to preventing uncontrolled inflation lies in three factors: the scale of the tariff impact, the time required for price transmission, and whether long-term inflation expectations can remain stable.

According to the Federal Reserve's preferred inflation measure—the Personal Consumption Expenditures Price Index (PCE), the annual growth rate in February 2025 was 2.5%, with March estimates ranging between 2.3% and 2.6%. Despite the rise in short-term inflation expectations, Powell emphasized that long-term inflation expectations remain largely anchored around the 2% target.

Signs of Slowing Economic Growth Emerge

Powell noted that signs of slowing economic growth have already appeared in the first quarter of the U.S. economy. Despite strong auto sales, overall consumer spending growth has slowed, and business import activities have been advanced in anticipation of rising tariffs, which may put pressure on GDP. The Atlanta Federal Reserve estimates that the first-quarter GDP growth rate could be -0.1%.

Meanwhile, 228,000 nonfarm jobs were added in March, with the unemployment rate remaining at 4.2%, indicating resilience in the labor market. However, Powell warned that if tariffs further impact business activity and consumer power, the unemployment rate may rise, presenting the Federal Reserve with more complex policy choices.

Limitations of Federal Reserve Policy Tools

During the Q&A session, Powell admitted, "Our tools can only achieve one of these two objectives at a time." He was referring to the Federal Reserve's inability to simultaneously suppress inflation and stimulate growth through interest rate policy. If both inflation and unemployment rates rise, the Federal Reserve will have to choose between raising and lowering interest rates.

He added, "We may find ourselves in a challenging situation where our dual mandate goals are in conflict." At that time, the Federal Reserve will make the most appropriate policy choice based on the economic distance from each target and the time required to achieve them.

Market Reaction and Policy Stance

Following Powell's remarks, U.S. stocks fell sharply. The Dow Jones Industrial Average dropped nearly 700 points, the S&P 500 fell by 2.2%, and the Nasdaq declined by 3.07%. Uncertainty over tariff policy and expectations of high interest rates from the Federal Reserve have made investors more cautious.

Although the market expects the Federal Reserve to possibly start cutting interest rates in the second half of 2025, Powell emphasized that the current policy stance is already "moderately restrictive," and the Federal Reserve has room to wait for a clearer situation before making adjustments. He stated, "We are currently in a good position to wait for the situation to become clearer before considering whether to adjust the policy stance."

Consensus Within the Federal Reserve

In addition to Powell, several Federal Reserve officials have also expressed concern about the inflation risks posed by tariffs. New York Federal Reserve President John Williams and Governor Christopher Waller both pointed out that tariffs could lead to "persistent inflation." Waller further stated that if economic growth slows significantly, he might support an early rate cut even if inflation remains high.

However, other officials, including Minneapolis Federal Reserve President Neel Kashkari, emphasized that the current primary task remains to suppress inflation, indicating that there is still consensus within the Federal Reserve on the policy direction.

References

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