Fed Chair Jerome Powell sees danger ahead for interest rates, tariffs

After years of heightened inflation, the Federal Reserve spent most of 2024 working toward curbing inflation and delivering a soft landing for the U.S. economy. Once inflation began tapering toward the Fed’s goal of 2%, the central bank began cutting interest rates to provide relief to borrowers.

However, inflation began creeping up again toward the end of 2024, and mounting economic and political uncertainty have sparked fears of a looming recession.

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After months of consecutive rate cuts, the Fed held the federal funds rate at 4.25-4.5% following the January and March Board of Governors meetings. Now, it’s looking increasingly likely that the Fed will maintain this level through May, and even beyond.

Powell has insisted that the central bank wait for precise data, stating that the economy needs assistance before making any changes to interest rates. However, he concedes that action will likely be taken as the economy feels the effects of recently enacted Trump administration tariffs.

Fed chair Jerome Powell is seen answering questions following a Board of Governors meeting. The Fed has been vocal about taking a ‘wait and see’ approach to interest rates as the economy reacts to new Trump administration policies. However, the central bank anticipates a few changes on the horizon.

Image source: Getty Images

Fed maintains ‘wait and see’ approach to interest rates, but warns that impacts from tariffs are certain

CME FedWatch predicts less than a 14% chance of an interest rate cut at the upcoming May Fed meeting. However, that likelihood increases for meetings later in the year, as economists increasingly predict fallout from recent trade wars.

After months of neutrality on proposed Trump administration policies, Powell gave a surprising warning on the economic impacts of tariffs and how the Fed will likely need to shift its strategy in the future.

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When addressing the Society for Advancing Business Editing and Writing, Powell noted that the Fed is still waiting to see how the economy reacts to new policies, which “seems like the right thing to do in this period of uncertainty.”

He also acknowledged that the Trump administration’s tariffs are “significantly larger than anticipated […] The same is likely to be true of the economic effects, which will include higher inflation and slower growth.”

Jerome Powell warns of rising inflation, unemployment risk

Though Powell’s remarks drew immediate criticism from the president, he has candidly predicted a few negative economic impacts as a direct result of Trump’s reciprocal tariffs.

Related: Trump tariff showdown could have huge impact on housing market

At another event at the Economic Club of Chicago, Powell speculated that the Fed will be tasked with balancing inflationary and employment pressures, as tariffs and rising prices will likely worsen both.

“In all likelihood, inflation is likely to go up as well,” he said, highlighting that some of the burden of tariffs will be “paid by the public.”

“We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension,” Powell explained. 

If inflation and unemployment rise simultaneously, the Fed will have to choose between prioritizing inflation by keeping interest rates high or sparking growth and employment by cutting interest rates.

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