Uncertain global macro conditions, rife with worries over how Trump’s tariff plans may shape the health of the global economy going ahead has also left the Federal Reserve with a tough task at hand—balancing inflation while saving jobs. The mammoth task at hand was acknowledged by Fed Chair as he took stage at the Economic Club of Chicago to state that the central bank might be left with limited flexibility to support the economy as it attempts to keep a stronghold over upside inflation risks in the wake of Trump’s trade tariffs.
Powell reiterated that the risks emerging from trade tariffs has put the Fed in a pickle, forced to make a choice between reining in inflation or managing unemployment risks. He further flagged a ‘strong likelihood’ of US consumers bearing the heat of high prices due to tariff restrictions while also struggling with increased job losses.
“It’s a difficult place for a central bank to be, in terms of what to do,” he said. Illustrating the policy dilemma, Powell compared it to a goalkeeper facing a penalty kick, forced to choose between diving toward inflation or slower economic growth. “We’ll be making what will undoubtedly be a very difficult judgment,” he said.
That said, Powell also reassured that policymakers would strike a balancing act to handle dual responsibilities of fostering maximum employment and anchoring price stability, “keeping in mind that, without price stability, we cannot achieve the long periods of strong labour-market conditions that benefit all Americans.”
The underlying tone of Powell’s comments reiterated his previous stance that the Fed is in no hurry to trim interest rates, especially given that the threat of upside inflation risks remains ripe.
“For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance,” Powell said.
Inflation Risks Looms Large
Taking cognizance of the higher-than-expected tariffs imposed by, Powell added that the duties are highly likely to generate at least a temporary rise in inflation. Even with that, he cautioned that the risk for those inflationary effects to be more persistent exist too.
“Avoiding that outcome will depend on the size of the effects, on how long it takes for them to pass through fully to prices and, ultimately, on keeping longer-term inflation expectations well anchored,” he said.
With that backdrop, Powell stated that the Fed’s immediate focus remains on withholding tariff-driven price spikes from turning into persistent inflation. To that effect, Powell looked back to the 2022 interest rate hikes, the sharpest in four decades, which came as a reaction to what was initially misjudged as ‘transitory’ inflation. Prices, which had peaked above 7%, have since cooled to around 2.5% earlier this year.
Furthermore, Powell also cited concerns over global supply shocks due to tariff restrictions which may hit several sectors, especially those involved in manufacturing, and hold the power to prolong inflation. Pointing to carmakers, he warned that tariffs could ‘disrupt significantly’ complex assembly networks. “You would worry that that process will take some years and that the inflationary process might be extended,” he said. “Supply disruptions like that can turn what would’ve been a one-time inflation shock into something more persistent.”
What it Means for the Markets?
Powell’s clear stance over inflation being the Fed’s top priority gave markets an answer they weren’t hoping for. What that means is that the Fed will likely hold rates higher for longer than what the market was pricing in and hence, Powell’s words soured sentiment on Wall Street overnight.
Powell also addressed the heightened volatility in equity markets following Trump’s tariff announcement, noting that “markets are functioning, conditional on being in such a challenging situation.”
However, even though it appears to be a sour pill to swallow, Powell’s comment did gave investors the clarity they needed to be on their own, for now as the central bank targets the bigger evil of inflation.
