US Federal Reserve chairman Jerome Powell on Friday warned that President Donald Trump's larger-than-expected tariffs could drive up inflation and weaken economic growth, but maintained that the central bank is not rushing to cut interest rates.
“While uncertainty remains elevated, it is now becoming clear that the tariff increases will be significantly larger than expected,” Mr Powell said at the Society for Advancing Business Editing and Writing annual conference in Arlington, Virginia.
“The same is likely to be true of the economic effects, which will include higher inflation and slower growth. The size and duration of these effects remain uncertain.”
Mr Powell's remarks were his first since the Fed held interest rates steady around 4.3 per cent last month, and the first time since Mr Trump announced universal and “reciprocal” tariffs against trading partners, leading to a global US-led market sell-off.
Mr Trump's latest tariffs, imposed at a level unseen in nearly a century, deliver a nightmarish scenario that raises the risks to both the Fed's inflation and maximum employment mandates.
Those fears have seeped into US markets, which continued their steep sell-off on Friday after a Thursday rout. The Dow Jones Industrial Average was down more than 1,700 points during afternoon trading. The S&P 500 and Nasdaq Composite fell by a further 4.93 and 5.02 per cent.
That has led to traders anticipating a series of aggressive rate cuts from the Fed now predicting four quarter-point reductions this year, according to CME Group data.
But the Fed chair pushed back on market expectations, saying “it is too soon to say what will be the appropriate path for monetary policy”. That sentiment is broadly in line with the Fed's cautious approach in recent months.
Before Mr Powell delivered his remarks, Mr Trump took to social media urging him to cut rates and “stop playing politics”.
Fed officials have been considering whether the tariffs will lead to a one-time inflationary bump, but Mr Powell warned the inflationary impact could be more persistent.
“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,” he said.
The US is coming off one of its worst bouts of inflation in decades. While the Fed has knocked inflation down from its 2022 peak, the level remains above its 2 per cent target.
Most economists argue that if tariffs were to remain in place, they would raise inflation and lead to lower growth. One JP Morgan analysis raised its odds of a global recession from 40 per cent to 60 per cent because of the economic impact of a new trade war.
Despite the rising uncertainty, Mr Powell said the economy remains “in a good place” and that the labour market is solid. While he noted recent surveys showed near-term inflation expectations have gone up, longer-term inflation expectations are in line with the Fed's 2 per cent target.
