Federal Reserve chair Jay Powell has warned that Donald Trump’s tariffs will stoke “higher inflation and slower growth” as the president’s plans for steep levies on the US’s trading partners shake global financial markets.
“It is now becoming clear that the tariff increases will be significantly larger than expected,” Powell said in prepared remarks to a conference in Virginia on Friday. “The same is likely to be true of the economic effects, which will include higher inflation and slower growth.”
Powell also highlighted that risks to unemployment, which has remained subdued in recent months, were rising.
Powell’s remarks come after Trump’s announcement on Wednesday of a universal 10 per cent tariff and much bigger duties on many key trading partners has sent markets reeling. Wall Street’s S&P 500 has sustained two days of heavy selling, leaving the blue-chip index on track for its worst week since the start of the coronavirus crisis five years ago.
Trump, prior to Powell’s remarks, said on his Truth Social platform: “This would be a PERFECT time for Fed Chairman Jerome Powell to cut Interest Rates.”
The Fed chair stressed that “uncertainty” was high in terms of “what will be tariffed, at what level and for what duration, and the extent of retaliation from our trading partners”.
It was “too soon to say what will be the appropriate path for monetary policy”, signalling that the central bank is minded to keep its main interest rate at its current range between 4.25 per cent and 4.5 per cent until there is more clarity about the fallout. But Powell said there were “elevated risks of both higher unemployment and higher inflation” that would have to be closely watched.
“While tariffs are highly likely to generate at least a temporary rise in inflation, it is also possible that the effects could be more persistent,” Powell said. “Our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem.”