President Donald Trump and Federal Reserve Chairman Jerome Powell hinted at the impact that tariffs might have on the world’s biggest economy, with both surprising investors by adopting a stance that seemed to contradict their previous views.
Speaking to reporters in Washington following the central bank’s widely expected decision to hold interest rates steady at 4.375%, Powell said the Fed’s new growth and inflation forecasts — which lowered GDP estimates while warning of renewed price pressures — underscored the tariff-related uncertainty the economy faces in coming months.
Powell said that putting together the new forecasts, formally called the Summary of Economic Projections but commonly-referred to as the Dot Plots, was “an admittedly challenging exercise” as a result.
“While these individual forecasts are always subject to uncertainty, as I noted uncertainty today is unusually elevated and, of course, these projections are not a committee plan or a decision,” Powell said.
“Policy is not on a preset course (and) as the economy evolves we will adjust our policy stance in a manner that best promotes our maximum employment and price stability goals,” he added.
President Trump and Fed Chairman Powell at a nomination ceremony at the White House on Jan. 23, 2018. Trump wants lower rates. Powell is in no hurry. Sound familiar.
Xinhua News Agency/Getty Images
Curiously, though, Powell went on to say that those projections were built around a base case that inflation stoked by U.S. import tariffs would be “transitory.” That’s a word most observers had assumed was indefinitely retired in 2022 when post-pandemic inflation ran much hotter than Fed officials had anticipated.
‘Transitory’ redux at the Fed?
“The last time there were tariffs … inflation was transitory,” Powell insisted when pressed by reporters. “And it’s still the truth. If there’s an inflationary impulse that’s going to go away on its own, it’s not the right policy to tighten.”
Those remarks, alongside Fed forecasts of two quarter-point interest-rate cuts by year-end, triggered a sharp pullback in Treasury bond yields, which in turn powered stocks firmly higher in the wake of Powell’s news conference.
Trump wanted more, however. Through a post on his Truth Social network he urged the Fed to “do the right thing by lowering rates as U.S. tariffs start to transition — ease! — their way into the economy.”
Related: Fed delivers big inflation surprise even as it holds rates steady
The word “ease” might be doing some heavy lifting in this instance, as the American Chamber of Commerce to the European Union, a trade lobby, suggests that a trade war would put the $9.5 trillion in shared business between the two regions at risk.
Multiple media reports, meanwhile, suggest the White House is preparing tariffs on trillions of dollars of goods on the April 2 deadline the president has dubbed “Liberation Day.” That’s on top of the delayed duties on goods from Canada and Mexico, as well as the increased tariffs on China.
But while Trump’s call on the Fed to ease rates is largely consistent with his longer-term view on rates (he’s a real estate exec, after all), it does indicate a deeper concern, one he’s only recently conceded: Tariffs aren’t a tax on other countries and they will slow U.S. growth.
Recession risks
JP Morgan Chase has pegged the odds of a U.S. recession at around 40%, while the Atlanta Fed’s GDPNow forecaster, which has flaws, sees the economy contracting at a 1.8% pace over the first three months of the year.
That’s left the Fed once again having to calibrate both the inflationary impact of levies that haven’t yet been put in place and could be delayed, altered or canceled at any moment, and the slow but assured damage they’ll do to the broader economy.
Powell said Fed rates remain “restrictive,” in that they’re high enough to tame inflation for the moment while they allow enough room for reduction if the economy and the job market were to deteriorate.
Related: Tariff uncertainty triggers record change to U.S. stock market outlook
What he didn’t suggest, however, was concern about the recent stock market correction, which has lopped more than $4 trillion of market value from the S&P 500 over the past three weeks.
“The Fed ‘put’ is gone,” said EY economist Gregory Darco. “It will take much more than a 10% stock market correction for policy makers to provide monetary policy support.”
“But we shouldn’t get lulled into a false sense of Fed policy stability,” he added. “Policy direction could rapidly turn more dovish on weaker economic and labor market data, just like it could turn hawkish on a broad-based rise in long-term inflation expectations.”
Uncertain about uncertainty
That, in a nutshell, is where markets find themselves: uncertain how the Fed will react, and uncertain how tariffs will affect growth, inflation and employment over the coming months.
Trump could be right, in terms of needing lower rates to offset their impact, and Powell could be wrong in assuming their influence on price pressures will be short-lived.
But the opposite is also true.
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“We are in a period of watching, interpreting, projecting, surmising and quite frankly guessing, with wide error bands around all of the action verbs,” said Rick Rieder, BlackRock’s chief investment officer of global fixed income.
“Like market participants, the Fed is at a highly uncertain point, and it is in need of time and data to determine the next course of action.”
The same could be said for the president.
Related: Veteran fund manager unveils eye-popping S&P 500 forecast
