In a recent speech delivered at the Economic Club of Chicago, Federal Reserve Chair Jerome Powell addressed the potential impact of President Trump’s tariffs. Powell acknowledged that the officials at the central bank are expecting these import taxes to elevate the cost of living. The Fed's goal, according to Powell, is to prevent these price increases from spiraling into a long-standing bout of inflation.
The tariffs have surpassed the expectations of forecasters, Powell admitted, indicating a larger impact than the bank had initially anticipated. His statements provided insights into the Federal Reserve's potential responses to the escalating trade conflict. Powell cautioned that trade policies could inhibit the central bank's "dual mandate" to control inflation while maintaining job stability. He alluded to the fact that the Federal Reserve is not prepared, at this juncture, to cut interest rates to stimulate the financial markets or the economy.
Raising or lowering the federal funds rate, a tool that influences the cost of all types of loans, is the Fed's primary method for managing the country's economy. Under current economic conditions, the Federal Reserve is maintaining high rates, giving rise to pricier loans and potentially slowing the economy, which in turn decreases inflationary pressures. This policy aims to counteract inflation in the wake of the pandemic's aftermath.
Powell stated that the bank would be hesitant to reduce these rates, even if financial markets were to take a significant hit. His assertion contradicts traditional central bank protocols that would typically encourage easing tariff-induced price increases by lowering or maintaining interest rates. Powell justified this approach by citing the pandemic's influence on the central bank's decision-making process, exemplified by the impact of supply chain disruptions on automobile prices, which contributed significantly to the inflation surge in 2022. Now, the bank aims to ensure that price hikes remain a one-time occurrence and do not trigger a continual inflation cycle.