Powell Links Trade to Pricing without Hesitation as the Fed Modifies its Estimates

During a much-awaited news conference on Wednesday, Jerome Powell did not mince words when discussing the effects of President Trump’s tariffs.

The chairman of the Federal Reserve stated unequivocally that Trump’s trade policy would undoubtedly raise prices, even if it were unclear how much and whether the price increases would be “transitory.”

When asked about price stability on Wednesday afternoon, Powell gave one example: although inflation had previously approached the Fed’s primary objective, “I do think with the arrival of the tariff inflation, further progress may be delayed.”

It was only one of several remarks made by the central banker that stood in contrast to previous sessions in which he frequently refused to provide a detailed opinion.

Powell’s comments followed the Fed’s decision on Wednesday to keep interest rates unchanged while sticking to its forecast of two rate cuts later this year.

The central bank did, however, alter its view, making it more optimistic about inflation and less confident about economic growth. Powell said price increases are “due to the tariffs coming in.”

Even though Trump’s trade stance has agitated markets and reduced economic growth estimates for the rest of the year, several experts questioned the Fed’s unaltered overall prognosis of two cuts this year.

In a note released just after Wednesday’s decision but before the press conference, Capitol Economics stated, “We continue to think that Fed officials are underestimating the extent to which tariffs are likely to push up inflation.”

In his first months in office, Trump has already imposed additional tariffs on steel, aluminum, Canada, Mexico, and China. A crucial deadline of April 2 threatens reciprocal taxes that might be historic in their reach and breadth.

In anticipation of what he calls the “big one” regarding tariffs, Trump has declared April 2 “Liberation Day.” The decision has already been made, and analysts predict further volatility as investors and companies prepare for the policy’s full impact.

‘Transitory’ Tariff Inflation Risk:

Powell made several statements throughout his press conference on Wednesday that the precise impact of pricing tariffs was unknown, might never be understood, and might even be short-term.

He used the often criticized term “transitory” to describe the price consequences of tariffs, which was first used by the Fed and other economic authorities in 2021 when prices began to climb under Joe Biden’s administration.

Powell described a short-term impact on prices as “kind of the base case, but we really can’t know that” while upholding the Fed’s long-standing policy of waiting to intervene in Trump’s still-developing economic program. However, there were also some quick criticisms of using the loaded term.

Queens’ College president Mohamed A. El-Erian swiftly wrote, “Given all the uncertainties and especially after the major policy error earlier this decade, I would have thought that some Fed officials would show greater humility.” Democrats also criticized the importance of tariffs.

In a statement, Daniel Hornung, Joe Biden’s deputy director of the National Economic Council, stated that the revised estimates are “all about tariffs and policy uncertainty,” adding that “these are the major factors standing in the way of interest rates coming down.”

Powell’s admissions on Wednesday were in contrast to previous Fed meetings when Powell frequently stated that he was thinking about Trump’s impending plans without delving further into the issue of whether a fresh round of tariffs would lead to inflation.

Powell briefly cited a September 2018 “Tealbook” simulation on tariffs and pricing in December last year, calling it “a good starting point” but refusing to comment on then-President-elect Trump’s proposals in further detail.

Days after Trump’s inauguration, the Fed’s committee notably dropped any mention of inflation moving closer to its 2% inflation target at its most recent meeting in January.

Powell made it apparent this time that he saw the tariffs as a challenge to his attempts to get inflation down to the 2% target, but he still had faith in the central bank’s ability to manage it. “We think our policy is in a good place to react to what comes,” he stated.