The economy will likely stumble as it adjusts to new trade policies announced by the Trump administration, Federal Reserve Chair Jerome Powell said Wednesday. But it’s unknown whether any inflationary effects will be long term or a one-time hit for businesses and consumers.
“The level of tariff increases announced so far is significantly larger than anticipated, and the same is likely to be true of the economic effects, which will include higher inflation and slower growth,” Powell said during an address to The Economic Club of Chicago. “Our obligation is to keep longer term inflation expectations well-anchored and to make certain a one-time increase in the price level does not become an ongoing inflation problem.”
The Fed has a dual mandate from Congress to keep a lid on inflation, typically by hiking interest rates if prices spiral up, and promote maximum employment, cutting rates if job growth slows, he added. But the new tariff regime could put the Fed in a bind if prices increase and jobs evaporate all at once.
“We may find ourselves in the challenging scenario in which our two mandated goals are in tension,” Powell said. “As that great Chicagoan Ferris Bueller once noted, ‘Life moves pretty fast.’”
Powell sought to calm fears about the current state of the economy. Inflation over the past year was a relatively low 2.3%, just above the Fed’s 2% target, and preliminary data show the economy added 228,000 jobs in March.
“Despite heightened uncertainty and downside risks, the U.S. economy is still in a solid position,” he said. “The labor market is at or near maximum employment and inflation has come down a great deal.”
The Fed cut interest rates several times last fall, after inflation fell below 3%. It held rates steady over the winter when prices ticked up slightly and uncertainty rose about what policies the new administration would pursue.
The Trump administration has announced a flurry of new policies, including sky-high tariffs on China, other tariffs — many canceled or delayed — on top trading partners such as Canada, possible deep spending cuts and a regulatory overhaul.
Powell said the Fed will adopt a wait-and-see attitude about the many changes and examine the economic data as it rolls in before discussing any interest rate tweaks. But there are some indications of a darkening outlook.
“The data we have on hand so far suggest growth has slowed in the first quarter of the year from last year’s solid pace,” Powell said.
Richard Traub, a Chicago-based partner with the law firm Smith, Gambrell & Russell, said it’s no surprise Powell sounds cautious.
“He’s saying I don’t know where the (new administration’s) policies are taking us,” he said. “The Fed is in the same quandary everyone else is. I talk to developers, investors, lenders, consumers, heads of households and they’re all in the same boat. We don’t know where these new and unfolding economic policies will take us.”
The tariff policies are especially confusing and could check new business investment if companies don’t know how much needed products or materials cost, Traub said.
“We have an administration which makes policies, but within days or a week they halt that policy or begin making exceptions,” Traub said. “Tariffs are on one day and off the next.”
Powell spoke more about maintaining price stability in the face of tariffs or supply chain disruptions than possible job losses, said Greg McBride, chief financial analyst for Bankrate, so unless employment numbers go sour, it’s unlikely the Fed will try goosing the economy with an interest rate cut.
“The tone has definitely been more hawkish,” he said. “He sounds like the concern is more on the inflation side than the economic slowdown side. The message is that they are not in a hurry to cut interest rates.”
Originally Published: April 16, 2025 at 5:52 PM CDT