Tariffs could force Fed to make a challenging decision, says Jerome Powell

Fed chairman says global supply chain disruptions could lead to more persistent inflation

US Federal Reserve chairman Jerome Powell speaks at the Economic Club of Chicago. AFP

US Federal Reserve chairman Jerome Powell on Wednesday said the economic effects of America's recently announced tariffs could force the central bank to decide whether to prioritise high inflation or weakening growth.

“We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension,” Mr Powell told the Economic Club of Chicago.

Unlike most other central banks, the Fed has two mandates – maintaining price stability and promoting employment growth. Economists fear that Mr Trump's larger-than-expected tariffs could reignite inflation, drive up unemployment and weaken growth.

“If that were to occur, we would consider how far the economy is from each goal, and the potentially different time horizons over which those respective gaps would be anticipated to close,” Mr Powell said.

He said he expects the US economy to slow in the first quarter compared to last year's pace.

However, he maintained his suggestion that the Fed could be patient in cutting interest rates as it awaits “greater clarity” on tariffs, immigration, deregulation and taxation.

Mr Powell said tariffs will probably create at least a temporary inflationary bump but warned the effects could be more persistent.

Part of the reason why tariffs may not lead to a one-time surge could be due to disruption in the global supply chain as a result of duties on China, and the impact of tariffs on the auto industry.

“That is the kind of thing it can take time to resolve, and it can lead what would have been a one-time inflation shock to be extended, perhaps more persistent,” Mr Powell said.

“Our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem."

His comments come as uncertainty over Mr Trump's tariffs has led to increased volatility in financial markets. That has fed into the bond market, with the yield on the 10-year Treasury rising more than 50 basis points last week to about 4.5 per cent at the end of last week, before settling at about 4.3 per cent this week.

Despite the uncertainty and volatility surrounding markets, Mr Powell maintained they remained healthy.

"Markets are doing what they're supposed to do. They're orderly, and they're functioning just about as you would expect to function," he said.

The Fed held its benchmark rate at about 4.3 per cent during its March meeting. Traders anticipate it will hold interest rates steady again next month before resuming cuts in June, according to CME Group data.

Current data shows that the US economy is in a good place. Reports showed the inflation cooled last month and that hiring remains solid, although surveys show consumer sentiment is plunging because of tariffs.

For the most part, Fed officials largely agree that tariffs will lead to a one-time bump in inflation, and have not included a recession in their respective base-case scenarios.