Federal Reserve Chairman Jerome Powell expressed on Thursday that the economy may be entering a phase marked by more unpredictable inflation and regular supply shocks, in contrast to the low inflation and unemployment levels seen in recent decades.
On Wednesday, Powell noted, “inflation might progress more than during the intercrisis period of the 2010s,” referring to the years following the 2008 financial crisis and the onset of the coronavirus pandemic in March 2020.
“We might face a time of more frequent and possibly more sustainable supply shocks, which could pose significant challenges for both the economy and the central bank,” Powell indicated during a review meeting of recent central bank policies.
He did not delve into specifics regarding what might be increasing the frequency of these supply shocks. Such disruptions include sudden spikes in commodity prices or work stoppages, reminiscent of challenges faced during the pandemic.
Last year, Powell suggested that the era of near-zero interest rates is likely coming to an end.
“We probably won’t revert to the conditions seen between the global financial crisis and the pandemic, characterized by very low rates and inflation. We anticipate rates won’t return to such low levels,” he said.
Recently, Powell has pointed out significant policy shifts initiated by the Trump administration concerning immigration, trade, regulation, federal spending, and taxation.
The trade war initiated during Trump’s presidency has gained attention, especially recently, as U.S. tariff rates rose to around 25% in April, largely driven by three-digit tariffs on imports from China.
According to Fitch, the Wall Street rating agency, China’s 145% tariffs have been reduced, with U.S. tariffs now closer to 13% instead of 25%.
Nonetheless, the trade situation remains fluid, characterized by notable changes in numerous country-specific tariffs, including a 25% tariff on imports from Mexico and Canada, and a “de minimis” exemption for imports from China valued under $800.
Powell indicated it’s improbable that interbank lending rates will remain “stuck at the lower limit,” resembling the period from 2008 to 2015 when unemployment held steady at around 0%, even as it gradually declined.
On Thursday, Powell stressed the importance of maintaining public expectations for low inflation—a policy the Fed emphasized during the last significant inflationary period in the 1970s and continued throughout a moderating business cycle and higher productivity growth of the 1990s.
