Federal Reserve Chair Jerome Powell said Friday that the central bank can remain patient in adjusting its benchmark interest rate, citing uncertainty around the potential impact of President Trump’s economic policies.
Powell said the Trump administration is making policy changes in several areas, including trade, taxes, government spending, immigration and regulation, and added that the “net effect” of those changes are what will matter for the economy and the Fed’s interest rate policies.
“While there have been recent developments in some of these areas, especially trade policy, uncertainty around the changes and their likely effects remains high,” Powell said at a conference in New York. “As we parse the incoming information, 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.”
Most economists say that Trump’s plans to slap tariffs on a wide array of imports, including 25% duties on goods from Canada and Mexico that he partially delayed Thursday, will push up prices and slow growth. But many also expect that tax cuts and deregulation could boost the economy.
Powell’s comments pushed some traders to pare back their forecasts for how many interest rate cuts the Fed may deliver this year. They had been banking on at least three following a stream of weaker-than-expected reports on the U.S. economy. But Powell reiterated the Fed is likely on hold for a while. That sent Treasury yields higher in the bond market.
Rate reductions could help bring down borrowing costs for mortgages, auto loans, credit cards, and business loans.
President Trump in January pressed the Fed to ease borrowing costs, saying in a speech at the annual World Economic Forum gathering in Davos, Switzerland that he planned to “demand that interest rates drop immediately.”
Inflation expectations are key
In a question and answer session, Powell acknowledged that typically tariffs would cause a “one-time” price increase, rather than persistent inflation, and the Fed could ignore such a temporary effect. Treasury Secretary Scott Bessent on Thursday made a similar argument: “We could get a one-time price adjustment,” Bessent said, before adding, “I’m not worried about inflation.”
Yet Powell also said there were other considerations the Fed has to take into account when deciding whether to keep its rate unchanged, or even raise rates. For example, Powell suggested tariffs might have more than just a one-time impact “if it turns into a series” of tariff hikes, or “if the increases are larger, that would matter.”
“What really does matter is what is happening with long-term inflation expectations,” Powell added. Powell noted that shorter-term expectations have risen, partly out of concern about tariffs, though longer-term expectations have been stable.
Expectations that prices will rise can worsen inflation if they cause consumers and businesses to change their behavior in anticipation. Some companies might charge more when they expect their own costs to increase.
When Trump imposed tariffs in his last administration, Powell noted, the Fed ended up reducing its key rate, “because growth weakened so much.”
Economists with Goldman Sachs and Morgan Stanley this week forecast that inflation is likely to edge up in 2025, citing the potential impact of tariffs and other Trump administration policies.
“Larger tariffs are also likely to hit GDP harder through their tax-like effect on disposable income and consumer spending and their effect on financial conditions and uncertainty for businesses,” Goldman analysts wrote in a report.
The cost of food, shelter and other items remains a top economic issue around the U.S., with the soaring cost of eggs becoming a national talking point. A recent CBS News poll found that 77% of Americans say their incomes aren’t keeping up with the pace of inflation.
Powell says economy remains solid
Powell said the economy remains mostly healthy despite “elevated uncertainty.” He characterized Friday’s jobs report, which showed employers added 151,000 jobs and the unemployment rate ticked up to 4.1%, as in line with the “solid” gains of the past six months.
He also noted that there were signs consumer spending has slowed compared with the healthy gains in the second half of last year, and said surveys of consumers and businesses “point to heightened uncertainty about the economic outlook.” Further complicating matters, he acknowledged that measures of consumer sentiment “have not been a good predictor” of consumer spending in recent years.
The Fed’s own beige book, a collection of anecdotes from hundreds of businesses, mentioned uncertainty 47 times in its latest edition released Wednesday, up from just 17 times in January. The Fed publishes the beige book eight times a year.
Powell spoke at a conference organized by the University of Chicago’s Booth School of Business.
President Donald Trump’s on-again, off-again tariff policy and rapid-fire layoffs of government workers has created a spike in uncertainty among businesses and caused a sharp drop in consumer confidence. Many economists have marked down their estimates for the economy’s growth to as low as 1% at an annual rate in the first three months of this year, down from 2.3% in last year’s final quarter.
Yet as Fed governor Christopher Waller noted Thursday, there are “good news” cuts and “bad news” cuts. “Bad news” cuts occur if the Fed reduces rates out of concern that the economy is slowing, while “good news” reductions are those that reflect a sense by the Fed that inflation is returning to its target of 2%.
Waller added that he still believes it will be possible for the Fed to engineer “good news” rate cuts later this year, though he dismissed the potential for a cut at the Fed’s next meeting this month.
After cutting its key rate three times last year to about 4.3%, Powell indicated in January that the Fed would pause any further cuts amid signs that inflation has remained stuck above its target. The central bank’s preferred inflation gauge shows that prices rose 2.5% in January compared with a year ago. Excluding the volatile food and energy categories, core prices rose 2.6%, the smallest increase since June.
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