Fed’s Powell says tariffs could lead to inflation, economic slowdown

Federal Reserve Chair Jerome Powell on Wednesday cautioned that the central bank could face a “challenging scenario” of managing both accelerating inflation and a slowing economy brought on by the impact of President Trump’s tariffs. 

In written remarks at the Economic Club of Chicago, Powell reiterated that the Trump administration’s tariffs are “significantly larger than anticipated.”

“The same is likely to be true of the economic effects, which will include higher inflation and slower growth,” he added.

Even so, Powell said the Federal Reserve can stay patient and wait to see how tariffs and other economic policies of the Trump administration play out before making any changes to interest rates. The sharp volatility in financial markets since Mr. Trump announced sweeping tariffs April 2, only to put most of them on hold a week later, has led to speculation about whether the Fed would soon cut its key interest rate or take other steps to calm investors. 

“For the time being, we are well positioned to wait for greater clarity” on the impact of policy changes in areas such as immigration, taxation, regulation, and tariffs, Powell said.

Powell said the inflation will likely be temporary, but “could also be more persistent,” echoing a concern expressed by a majority of the Fed’s 19-member interest rate-setting committee in the minutes of their meeting last month.

Mr. Trump’s tariffs have led economists to lower their expectations for U.S. economic growth and forecast higher inflation this year. Because tariffs are taxes paid by importers like Walmart, they typically pass on the added costs to consumers in the form of higher prices.

“Tariffs likely lead to higher prices while softening consumer sentiment and business optimism possibly means slower growth,” said Scott Helfstein, Global X’s head of investment strategy, in an email. “This is going to make economic forecasting more difficult, and the Fed is likely going to widen their bands growth and rates with risks to both price stability and full employment rising.”

Yet some splits among the Fed’s interest rate-setting committee have emerged. On Monday, Fed governor Christopher Waller said that he expects the impact of even a large increase in tariffs to be temporary, even if they are left in place for several years. At the same time, he also expects such large duties would weigh on the economy and even threaten a recession.

Should the economy slow sharply, even if inflation remained elevated, Waller said he would support cutting interest rates “sooner, and to a greater extent than I had previously thought.”

But other Fed officials, including Neel Kashkari, president of the Fed’s Minneapolis branch, have said they are more focused on fighting the effects of higher tariffs on inflation, suggesting they are less likely to support rate cuts anytime soon.

For now, most recent reports suggest the economy is in solid shape. Hiring has been solid and inflation cooled in March. Yet measures of consumer and business confidence have plunged, raising concerns among economists that spending and business investment could weaken.