Recently Jerome Powell, the new Chair of the Federal Reserve, stumbled into an acknowledgment of the predicament in which the central bank has found itself. He said that inflation and growth are becoming mutually exclusive goals. With the Fed’s key inflation measure anticipated to show a rate of 2.6% for March, Powell expressed concerns over the potential impact of tariffs on the economy, suggesting they could hinder progress towards the Fed’s dual-mandate goals of stable prices and full employment.
During a recent press conference, Powell elaborated on the Fed’s expectations, noting that while higher inflation is likely, growth is anticipated to slow. This, he argued, leaves unaddressed the question of where the Fed should focus its efforts—on taming inflation or reigniting growth. This conflicting information is a product of the real tension baked into the Fed’s dual-mandate goals.
“We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension,” – Jerome Powell
Powell underscored that tariffs can worsen this tension. He remarked that they are “likely to move us further away from our goals… probably for the balance of this year.” These tariffs are likely to result in some temporary increase in inflation. As time goes by, this increase could prove to be more durable.
That makes the Commerce Department’s unexpected 1.4% increase in retail sales in March good news indeed. This large increase makes it appear like consumer spending is proving its resilience. In reference to growth, Powell pointed out a deceleration in the first quarter. This represents a major pivot following last year’s record-setting high. As a reminder, the Atlanta Fed was projecting GDP growth at a blistering pace of -0.1% for Q1. This figure excludes an anomalous surge for those same months in gold imports and exports.
To that end, Powell really doubled down on the idea that the economy is in a “good place.” He’s trying to be positive, despite having tempered projections for continued growth. He noted that the recent survey and market based indicators show near-term inflation is increasing. Nonetheless, the medium- and longer-term forecast remains right around the Fed’s target of 2%.
“For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance,” – Jerome Powell
On interest rates Powell wasn’t very clear at all on where he sees rates going after this. He admitted that should such slow growth persist, the Fed would have to start thinking about lowering the interest rates. Conversely, should inflation rise significantly, the Fed would be inclined to maintain or even increase rates to help dampen demand.
Whether the challenges that tariffs present, including their inflationary impact, are undue burdens boils down to a number of factors. Powell made clear that avoiding a return to persistent inflation depends on just how large and permanent those effects are. Their incorporation into price signals will be key to making this happen. To avoid worse outcomes, he said it was essential to keep long-term inflation expectations firmly anchored at low levels.
“Tariffs are highly likely to generate at least a temporary rise in inflation,” – Jerome Powell
Powell ended on a familiar note, restating the Fed’s resolve to continue balancing its responsibilities in the face of these growing economic pressures. The central bank happens to be spooked at the moment. It will need to prudently calibrate its monetary policy on this difficult balancing act.