Fed's Powell looks to summer as 'meaningful' inflation approaches

Central bank chairman holds cautious approach after rates kept steady

Federal Reserve chairman Jerome Powell expects to see 'meaningful' inflation in the coming months. AFP

US Federal Reserve chairman Jerome Powell said it could still take months to understand how tariffs will effect the economy, underlining his cautious approach towards cutting interest rates.

"We expect a meaningful amount of inflation to arrive in coming months, and we have to take that into account," he told reporters in Washington, after the Fed held interest rates steady at about 4.33 per cent while maintaining its forecast for two quarter-point rate cuts this year.

The latest projections were the first since President Donald Trump's tariffs cast uncertainty in the economic outlook. He has since scaled back his universal and reciprocal tariffs, and announced a "trade truce" with China that lowered the planned 145 per cent rate on Chinese goods.

At the same time, Mr Trump doubled the tariff rate on aluminium and steel. The delayed implementation date for his reciprocal tariffs is July 9.

The uncertainty surrounding tariffs has also come down after Mr Trump scaled back his "Liberation Day" tariffs, although Mr Powell noted it remains elevated.

"We're adapting in real time," he said. "The effects of tariffs will depend upon other things on their ultimate level. Expectations of that level, and thus of the related economic effects reached a peak in April and has since declined."

Recent inflation readings have been mild, with the Fed's preferred metric climbing down to 2.1 per cent on an annual basis.

While these readings have been favourable for the Fed, Mr Powell said that data is "backward-looking".

"We feel like we're going to learn great deal more of the summer on tariffs," he said. "We'll make smarter and better decisions if we just wait a couple of months or however long it takes to get a sense of really what is going to be the pass-through of inflation."

In their quarterly Summary of Economic Projections, central bank policymakers increased their annual inflation forecast from their March forecast, bumping it up from 2.7 per cent to 3.0 per cent. The unemployment rate is forecast to climb slightly higher to 4.5 per cent.

"The SEP highlights what the Fed will be focused on, as inflation this year will be noticeably further away from its objective than the labour market will be," Ryan Sweet, chief US economist at Oxford Economics, wrote to clients.

Mr Powell said the delay in cuts would be due to expected rises in prices. This could come from any point in the supply chain, he said, with goods now being sold that retailers had imported before tariffs took effect.

"It takes some time for tariffs to work their way through the chain of distribution to the end consumers," he said. "Ultimately, the cost of the tariff has to be paid, and some of it will fall on the end consumer.

"We know that because that's what businesses say. That's what the data say from the past."