Federal Reserve Chairman Jerome Powell said that the tumultuous trade war waged by U.S. President Donald Trump could put the Fed in a difficult position not seen in nearly half a century.
The central bank's chairman said in prepared remarks for an event hosted by the Economic Club of Chicago that 'the level of tariff increases announced to date is much larger than expected; we may find ourselves in a difficult situation where our dual-mandate goals are under stress.'
The Federal Reserve is responsible for promoting full employment and controlling inflation, but Trump's tariffs threaten both objectives.
However, the U.S. economy is still in good shape at the moment, according to the latest data, allowing the Federal Reserve to be patient.
The Fed's stance will remain firm.
Powell said that the best step for the Federal Reserve at this time is to stick to its position until data clearly show how the U.S. economy is responding to Trump's policies.
And other officials at the Federal Reserve have said this in speeches they recently delivered, stating that they can change interest rates in either direction, depending on the needs of the economy.
But it's only a matter of time before Trump's tariffs exacerbate inflation, raise unemployment rates, and weaken economic growth, according to most economists, especially if the massive 'reciprocal' tariffs that briefly went into effect on April 9 are reinstated; Trump has postponed that historic increase in import taxes until July.
So far, Trump has imposed a 25 percent tariff on aluminum and steel, a 25 percent tariff on incoming goods from Mexico and Canada that do not comply with the free trade agreement; a massive 145 percent tariff on Chinese imports; a 25 percent tariff on cars, with separate tariffs on auto parts imposed later; and a basic 10 percent tariff on all U.S. imports.
The administration also provided temporary exemptions for some electronic goods, and Trump stated that separate tariffs on semiconductors, pharmaceuticals, copper, and lumber are likely to be imposed.
The priority of the Fed is inflation over recession.
The Federal Reserve may face a challenge it hasn't dealt with in decades, and looking back specifically at the 1970s and early 1980s, the U.S. economy suffered periods of high unemployment and double-digit inflation, a troubling combination known as 'stagflation.'
At that time, under the leadership of Federal Reserve Chairman Paul Volcker, the U.S. central bank prioritized combating inflation, even if it meant inflicting some damage on the economy.
It appears that the U.S. economy is heading in this direction, according to most forecasts, but it is unclear whether it will reach this point exactly or not.
Chicago Federal Reserve Bank President Austan Goolsbee said last week at an event in New York that Trump's tariffs put the central bank in the same difficult position.
He added, 'Tariffs are like negative supply shocks; they are stagflation shocks, meaning they exacerbate both sides of the Federal Reserve's dual mandate at the same time.'
He continued, 'Prices are rising while jobs are lost and growth is declining, and there is no general action plan on how the central bank should respond to a stagflation shock.'
Powell stated that if stagflation becomes a reality, 'we will consider how far the economy is from each target and the different time horizons during which these gaps are expected to be closed.'
He affirmed, 'We understand that rising levels of unemployment or inflation can be harmful and painful for communities, families, and businesses.'
Many Federal Reserve officials have stated that the central bank should closely monitor people's views on prices, which have deteriorated based on the consumer sentiment survey conducted by the University of Michigan, which is closely followed.
It is unclear when rising inflation expectations will drive the Federal Reserve to take any action, and what those actions will be.
And although inflation is much lower than its four-decade peak reached in June 2022, it remains slightly above the Federal Reserve's 2 percent target, meaning the Fed has less reason to resume cutting interest rates.
But for now, it seems that most officials agree that it is better to wait for any evidence to appear in the data.
Beth Hammack, president of the Federal Reserve Bank of Cleveland, said on Wednesday during an event in Columbus, Ohio: 'This is a set of risks that monetary policy struggles to deal with.'
She added, 'Given the starting point of the economy, and with both sides expected to face pressure, there is strong justification for keeping monetary policy stable to balance the risks from continued high inflation and a slowing labor market.'