Federal Reserve Chairman Jerome Powell said President Trump’s surprisingly strict tariffs could keep inflation higher than previously expected.
The country’s top central banker on Wednesday said Trump’s new wave of trade taxes was “significantly greater than expected,” adding that “the same is likely to include economic impacts and increased growth.”
“While avoiding that outcome depends on the magnitude of the effect, how long it will take them to fully pass to the price, and ultimately, fully fixing the expectations of long-term inflation,” he continued.
“The process will take years and you’ll be worried that the inflation process could be extended.”
Investors competed in the exit after Powell spoke, shaving losses before closing after the Dow Jones industrial average fell by 949 points, finishing 699.57 (1.7%). The S&P 500 and Nasdaq fell by 2.2% and 3.1% respectively.
“I think people were hoping Powell would be neutral. Instead he was Hawkish,” said Jim Carroll, a senior wealth advisor at Ballast Rock Private Wealth in Charleston, South Carolina, about the additional loss of stock in response to Powell’s appearance.
Powell added that tariffs are threatening to bring “challenging scenarios” that allow central bankers to choose to curb inflation and support the labour market.
“We may be in a challenging scenario where the goals of dual mandart are tense,” Powell said in his second public speech since Trump announced tariffs on April 2, in a prepared statement at the Chicago Economic Club.
According to Powell, the president’s large trade tax (a staggering 145% tax rate on Chinese products, a temporary 10% tax while the final tax rate is negotiated, but it could be difficult to achieve the Fed’s 2% inflation target while keeping the labour market strong.
In March, the Fed predicted two interest rate cuts later this year. That prediction came before the president announced his so-called “mutual” tariffs.
Powell reiterated that central banks still need not be in a hurry to change policies, particularly as the return-trip nature of tariff negotiations continues to flow through the US economy.
“As Chicago’s great Ferris Buhler once said, ‘Life moves pretty quickly,'” Powell explained. “For the time being, we are well positioned to wait for more clarity before we consider adjusting our policy stance.”
Powell also warned that economic growth could slow down.
“The data so far suggests that growth has slowed in the first quarter from a solid pace last year,” Powell said. “Despite strong car sales, overall consumer spending appears to be on a modest increase. Furthermore, strong first quarter imports reflect the company’s attempts to preempt potential tariffs, and we expect to weigh GDP growth.”
Gross domestic product growth for the first quarter will be reported later this month.
Retail sales data released by the Commerce Department on Wednesday shows strong growth. Sales exceeded expectations by 1.4%.
However, analysts warned that the sales indentations came from shoppers who flocked to car dealers and rushed to preempt the rise in prices due to tariffs, like buyers who flocked to car rates.
