US Federal Reserve chair Jerome Powell said it remains to be seen if the Trump administration’s tariff plans will prove to be inflationary, mapping out a checklist of things that could cause new import taxes to lead to more persistent price pressures.
“In a simple case where we know it’s a one-time thing, the textbook would say look through it,” with no need for the Fed to respond with tighter monetary policy, Powell said at a question-and-answer session during an economic forum in New York City.
“But you also want to be sure of a couple things,” he continued. “If it turns into a series of things … If the increases are larger, that would matter, and what really does matter is what is happening with longer-term inflation expectations. How persistent are the inflationary effects?”
“You want to look at all those things,” Powell said at the University of Chicago Booth School of Business forum. “And you want to remember the context, which is we came off a very high inflation and we have not fully returned to 2 per cent on a sustainable basis. So you put all that into the mix.”
At the same time, Powell noted, the trade actions Trump took in his first term in the White House, far from being inflationary, caused global growth to slow and actually led the Fed to cut interest rates. Powell spoke after a volatile week in which President Donald Trump imposed and then delayed 25 per cent tariffs on major trading partners Mexico and Canada. Those levies are still slated to go into effect in early April and other tariffs on imports possibly could be coming. Even as Powell was due to speak, Trump mused about moving faster on other tariffs he has promised to enact.
On Thursday (Mar 6), Treasury Secretary Scott Bessent insisted the tariffs might cause some one-off price increases but would not show up as persistent inflation. He suggested the Fed’s “Team Transitory” should “get back together” and look at tariffs in the same way it did at inflation in 2021.
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Bessent was referring to Powell and other Fed officials who expected that price pressures which began building early in the Covid-19 pandemic would dissipate largely on their own. Instead, inflation kept rising, with the Fed eventually approving the fastest rate hikes in a generation.
“Nothing is more transitory than tariffs if it’s a one-time price adjustment,” Bessent said. “Across the continuum, I’m not worried about inflation.”
‘Heightened uncertainty’
The contrast in views between Powell and Bessent shows the potential at least for conflict between the central bank and the new administration if Trump ultimately follows through on his threats to slap extensive new taxes on the trillions of US dollars in goods that US firms and families import each year.
The Fed has been open to the possibility that tariffs would shift prices only initially, as they are spread across importers, exporters, retailers and consumers, but not lead to steadily rising prices. Powell also said on Friday that the Fed will need to look at the “net effect” of all of Trump’s policies, which Bessent has described as a “whole-of-government, holistic programme” that will include regulatory changes the Treasury chief argues will add to growth and lower price pressures.
Until more is known, however, Powell said there is no need to rush further rate cuts, with inflation still “somewhat above” the Fed’s 2 per cent target and the current high borrowing costs considered appropriate to lower it further.
“The new administration is in the process of implementing significant policy changes … uncertainty around the changes and their likely effects remains high,” Powell said. “We are focused on separating the signal from the noise as the outlook evolves. We do not need to be in a hurry, and are well-positioned to wait for greater clarity.” Wall Street’s main stock indexes pared earlier losses after Powell spoke and were on track to close higher on the day. Financial markets added to bets the Fed will deliver in June the first of what investors expect to be three quarter-percentage-point rate cuts by the end of the year.
Powell’s remarks “provide an anxious market with some reassurance on growth while conveying an underlying somewhat dovish tone on policy,” Krishna Guha, vice-chairman of Evercore ISI, wrote in a note. “We think it is also telling that Powell volunteered the example of 2019, when the Fed under his leadership cut rates three times due to the growth impact of trade wars.” The economy “continues to be in a good place,” Powell said, with ongoing if uneven progress on inflation and continued job gains. The US government on Friday reported a gain of 151,000 jobs in February, and Powell noted the economy has been adding a “solid” 191,000 jobs a month on average since September.
The Fed is expected to hold its benchmark interest rate steady in the current 4.25 to 4.5 per cent range at its Mar 18-19 policy meeting. Policymakers will also issue new economic projections that will give insight into how the first two months of the Trump administration have influenced the outlook for inflation, employment, growth and the path of interest rates. REUTERS
