Powell warns of economic consequences of tariffs

Powell warns of economic consequences of tariffs

Washington, D.C. - President Donald Trump's sweeping policy changes, particularly on tariffs, pose an unprecedented challenge to the Federal Reserve, Chairman Jerome Powell said Wednesday.

Uncharted waters for the Federal Reserve

Powell emphasized: "These are very fundamental policy changes. There is no modern experience of how to think about them." The tariff increases announced by Trump significantly exceed expectations. Continued uncertainty over tariffs could cause long-term economic damage. The tariffs are pushing the economy in a direction characterized by weaker growth, higher unemployment and faster rising inflation - all at the same time. In this situation, the Federal Reserve is faced with a problem that it has not faced in almost fifty years.

Economic impact and market reactions

The Federal Reserve's job is to promote full employment and keep inflation in check. However, Trump's tariffs endanger both goals. However, current data shows that the US economy is in acceptable condition.

Federal Reserve Future Outlook

Powell said the Federal Reserve's best strategy right now is to wait until the data clearly shows how the U.S. economy responds to Trump's policies. But experts agree: It's only a matter of time before Trump's tariffs stoke inflation, increase unemployment and weaken economic growth, especially if the massive "reciprocal" tariffs that briefly took effect on April 9 are reinstated. Trump postponed this historic increase in import taxes until July.

Current tariffs and geopolitical tensions

So far, Trump has imposed tariffs of 25% on aluminum and steel and 25% on goods from Mexico and Canada that are not in line with a free trade agreement. Chinese imports are subject to a massive 145% tariff, while there is a 25% tariff on cars, followed by additional tariffs on auto parts at a later date. A base tariff of 10% on all US imports was also introduced.

The government has also introduced temporary exemptions for some electronic products. Trump has indicated that separate tariffs on semiconductors, pharmaceuticals, copper and lumber will soon follow.

Federal Reserve Expectations and Challenges

David Russell, global head of market strategy at TradeStation, commented: "Jerome Powell showed Trump the limits. It was a clear warning about stagflation and a declaration that the Federal Reserve will not support the government with interest rate cuts."

The Federal Reserve could face a challenge it hasn't faced in decades. In the 1970s and early 1980s, the U.S. economy was plagued by high unemployment and double-digit inflation—a problematic combination known as “stagflation.” Back then, the Federal Reserve, led by Paul Volcker, prioritized fighting inflation over growth, even if it caused economic pain.

Strategies to combat stagflation

Powell said that if stagflation were to become a reality, "we would consider how far the economy is from each target and the different time frames for closing those respective gaps." He emphasized that high rates of unemployment or inflation can be damaging and painful for communities, families and businesses.

Several Federal Reserve members have said the central bank should closely monitor perceptions of prices, which have worsened based on University of Michigan surveys. It remains unclear when rising inflation expectations could trigger measures from the Federal Reserve and what they would be.

The search for clarity for monetary policy

Although inflation is now below the June 2022 peak, it is still slightly above the 2% target. This means the Federal Reserve has less reason to cut interest rates again. However, most members seem to agree that it is best to wait for concrete data.

“This is a difficult set of risks for monetary policy,” Cleveland Fed President Beth Hammack said at an event in Columbus, Ohio. “Given the starting point of the economy and with both sides of our mandate under pressure, there is a strong case for keeping monetary policy stable to balance the risks posed by further rising inflation and a slowing labor market.”

“When clarity is difficult to achieve, waiting for additional data will help determine future course,” she added.