MNI: Powell Commits To Inflation Fight After Sweeping Tariffs

Federal Reserve Chair Jerome Powell on Friday warned President Trump's aggressive tariff hikes on major trading partners could drive inflation persistently higher and pledged the Fed's commitment to making sure inflation doesn't become a problem. 

However, the U.S. central bank isn't ready to make any changes to interest rates, he added. "We are well positioned to wait for greater clarity before considering any adjustments to our policy stance. It is too soon to say what will be the appropriate path for monetary policy," he said in remarks prepared for a journalists conference in Arlington, Virginia.

While Wall Street is betting the Fed will cut interest rates by more than 1 percentage point by the end of the year to counter a recession, Powell focused more on the Fed's inflation mandate in Friday's speech. 

"While uncertainty remains elevated, it is now becoming clear that the tariff increases will be significantly larger than expected. The same is likely to be true of the economic effects, which will include higher inflation and slower growth," he said. 

"While tariffs are highly likely to generate at least a temporary rise in inflation, it is also possible that the effects could be more persistent. Avoiding that outcome would depend on keeping longer-term inflation expectations well anchored, on the size of the effects, and on how long it takes for them to pass through fully to prices," 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." (See: MNI POLICY: Fed Forced Into Hawkish Stance Despite Growth Risk)

RISING DOWNSIDE RISKS

The Fed is "closely watching" the tension between the hard and soft data, Powell said. The former indicates a slower but still solid growth outlook while the latter show "dimming expectations" over the effects of Trump's policies and tariffs in particular, he said. (See: MNI INTERVIEW: Powell To Defend Fed's Inflation Mandate -Tracy)

The labor market remains broadly in balance, with the unemployment rate at 4.2% in March still in a low range, he said. 

However, both survey- and market-based measures of near-term inflation expectations have moved up, reflecting the idea that higher tariffs will be working their way through the economy and are likely to raise inflation in coming quarters, Powell said. Longer-term inflation expectations by most measure remain well anchored for now, he noted. (See: MNI INTERVIEW: Fed Must Stay Hawkish Amid Tariff Shock-Kamin)

The Fed is also seeking to better understand all of Trump's policy changes, in trade, immigration, fiscal policy and regulation, the Powell added. 

"We face a highly uncertain outlook with elevated risks of both higher unemployment and higher inflation," he said. "Our monetary policy stance is well positioned to deal with the risks and uncertainties we face as we gain a better understanding of the policy changes and their likely effects on the economy."