Earlier this year, Federal Reserve Chair Jerome Powell teased some interest rate relief on the horizon. Such a move would be well timed to address today’s economic environment, which is largely defined by inflation and a shift in the effects of tariffs. In a November 30 speech, Powell discussed the important lessons learned from the damaging effects of inflation. He understood that economic opportunity was still out of reach for many.
Powell acknowledged that inflation has created acute burdens, most acutely on those least able to bear the burden of rising prices. He looked back on the last five years, calling it a tragic illustration of these very struggles. “As it turned out, the idea of an intentional, moderate inflation overshoot had proved irrelevant,” he remarked. There was nothing deliberate and nothing gentle about the inflation that blew in just a few months after we proposed our 2020 changes to the consensus statement, as I publicly admitted in 2021.
Overall, Fed Chair Powell continued to emphasize the economy’s resilience and the strength of the labor market. He cautioned that increasing downside risks are more visible. While admitting that the weather could change in a hurry with tariffs driving up prices in unexpected ways, he said it could go a number of ways. His highly plausible, if somewhat timid, base case has the tariff impacts being short-lived—just a temporary “one-time shift in the price level.”
“It will continue to take time for tariff increases to work their way through supply chains and distribution networks,” Powell explained. He added, “Moreover, tariff rates continue to evolve, potentially prolonging the adjustment process.” Powell did not shy away from the storm clouds looming on tariffs. He added, the Fed isn’t likely to hold interest rates up purely due to these effects.
As a result, the market reacted positively to Powell’s comments. Immediately after his speech, the Dow Jones Industrial Average soared by more than 600 points. On top of that, the yield on the 2-year Treasury note dropped 0.08 percentage points to roughly 3.71%. This move signals strong investor faith in Powell’s judgement for safely charting a course through all of today’s economic unknowns.
Powell reiterated that FOMC members will act according to how they judge the data as it unfolds. They will think about what it means for the outlooks for the economy and the balances of risks. “We will never deviate from that approach,” he asserted, emphasizing a steadfast commitment to maintaining long-term inflation expectations.
The Fed Chair made clear that despite policy being currently restrictive, assessments going forward could justify changing the policy stance. “Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance,” he stated.