Fed Chair Powell Emphasizes Inflation Risks Of Trump Trade War

The Federal Reserve appears to be bracing for a fresh surge of inflation from President Donald Trump’s campaign of tariffs.

In a speech to the Economic Club of Chicago Wednesday, Fed Chair Jerome Powell said officials at the central bank expect the import taxes Trump imposed this month to push up the cost of living and are determined not to let that bout of price increases turn into a prolonged period of inflation.

“The tariffs are larger than forecasters had expected, certainly larger than we expected, even in our upside case,” Powell said.

Powell’s remarks shed light on the Fed’s possible response to the rapidly changing trade war. Powell said trade policy could be a setback to both sides of the Fed’s “dual mandate” to keep inflation under control and joblessness in check. Powell suggested the Fed wasn’t ready to jump in to boost financial markets and the economy by cutting interest rates—at least not yet.

Fed Is Unlikely To Cut Its Influential Interest Rate

Powell echoed the recent comments of other Fed officials, saying the tariff war could pose a “challenging” scenario by slowing down the economy while pushing up prices.

The Fed’s main tool for managing the economy is raising or lowering the federal funds rate, which influences borrowing costs on all kinds of loans. A higher fed funds rate means more costly loans, and a slower economy, reducing inflation pressures. A lower fed funds rate means easy money and a boost to the job market.

The Fed has been keeping the rate high in recent years to combat the post-pandemic surge of inflation, and Powell’s remarks indicated the Fed would be reluctant to cut rates even if financial markets took a dive.

When asked whether the Fed would step in with rate cuts if markets plunged, Powell said, “No, with an explanation”—markets were functioning in an orderly fashion and predictably responding to the uncertainty surrounding the rapidly changing tariff policies.

Powell Reluctant To Look Through Price Increases

A tariff is, in theory, a one-time price increase, whereas inflation is, by definition, a sustained increase in prices.

By that logic, central bank doctrine dictates the Fed should “look through” tariff-driven price increases and not necessarily raise interest rates or keep them high in response. However, Powell said the central bank’s experience during the pandemic challenged that logic.

For example, he said, disruptions in the supply of computer chips affected car prices, which were a major reason overall inflation surged in 2022. He said the Fed was determined not to let that happen again.

“Our role is to make sure that this is a one-time increase in prices and not something that turns into an ongoing inflation process,” he said.