Federal Reserve Chair Jerome Powell on Friday appeared to back away from a “base case” view that inflation from President Trump’s new tariffs could be transitory, saying that “it is also possible that the effects could be more persistent” as the economy digests “significantly larger-than-expected” trade duties.
Trump, at the same time, turned up the pressure on Powell, calling on him to lower rates.
“This would be a PERFECT time for Fed Chairman Jerome Powell to cut Interest Rates. He is always ‘late,’ but he could now change his image, and quickly,” Trump posted on social media, adding, “CUT INTEREST RATES, JEROME, AND STOP PLAYING POLITICS!”
Powell made it clear during his remarks at an event in Arlington, Va., that the Fed isn’t in a hurry to take any action on rates due to many uncertainties, saying, “It is too soon to say what will be the appropriate path for monetary policy.”
But because it is now clear Trump’s planned tariffs are exceeding expectations, he added, “The same is likely to be true of the economic effects, which will include higher inflation and slower growth.”
While the size and duration of those effects “remain uncertain,” the inflation impact has the potential to be longer lasting, he noted.
“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.”
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The acknowledgement that inflation has the potential to be more persistent differs from a stance that Powell took last month in a press conference with reporters, where he said that his “base case” was that any extra inflation from Trump’s slate of tariffs would be “transitory.”
That transitory stance aligned with a view also expressed earlier by Treasury Secretary Scott Bessent.
Trump certainly made Powell’s job that much more difficult this week as he unveiled the steepest tariffs in more than 100 years.
Trump’s tariff rollout this week also took markets by surprise, spurring the worst one-day rout in US stocks since the start of the 2020 COVID-19 crisis in March 2020. Stocks fell again Friday, deepening the market turmoil.
Economists scrambled to revise their forecasts in ways that present twin challenges for the central bank: higher inflation and slower growth. Maybe, as some economists said, a US recession.
Traders reacted by boosting the number of interest rate cuts they expect to see from the central bank this year to four, as they bet recessionary worries will outweigh concerns about rising prices. They expect the first cut in June.
Yahoo Finance
