Jerome Powell has warned that the Fed may soon have to choose between controlling inflation and supporting growth, as tariffs drive up prices and weigh on demand. Markets are jittery, divisions inside the Fed are widening, and futures now point to a rate-cut cycle starting in June. The central bank is holding steady for now, but pressure is building fast.
Powell Warns Tariffs Could Derail Fed Mandate
Federal Reserve Chair Jerome Powell isn’t known for theatrics, but his latest comments in Chicago suggested a growing unease beneath the usual central bank restraint. The Fed, he warned, could soon be navigating a rather unwelcome contradiction: tariffs pushing inflation higher even as they drag growth lower.
The message was clear. While the Fed is in a strong position to hold fire for now, Powell conceded that the economic fallout from the Trump administration’s trade policy may be more disruptive than initially expected.
At the heart of the issue is a clash between the Fed’s dual mandate. Price stability would typically demand tighter policy in the face of rising inflation. But if those same tariffs begin to weigh on growth and employment, the case for easing becomes harder to ignore. Not exactly a textbook scenario for clean policy decisions.
“We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension,” Powell said, referring to the Fed’s twin objectives of price stability and maximum employment.
With political actions now fuelling both sides of the problem, the Fed finds itself reacting to forces largely beyond its control. Powell is leaning on caution, for now. But as the economic signals grow more conflicted, staying put may prove the least comfortable option on the table.
Markets Volatile After Trump’s Tariff Shock
Markets have been on a rollercoaster since President Trump’s tariff announcement on April 2, followed by a partial walk-back just a week later. It’s been a volatile stretch, but one that, according to Jerome Powell, still fits within the bounds of rational behaviour.
The Fed Chair characterised the market reaction as a logical response to abrupt shifts in trade policy, adding that despite the choppiness, the underlying mechanics remain intact. “Markets are functioning just about as you would expect them to,” he said, in a subtle rebuff to those hoping for the Fed to step in simply to calm nerves.
Still, the economic side effects are becoming harder to brush off. Tariffs, effectively a tax on imported goods, are already feeding through to higher prices and dampening business confidence. Stagflation isn’t on the table yet, but the ingredients are getting warm.
Powell, while careful not to overstate the case, flagged the inflation risk more clearly than in past statements. He acknowledged that some of the upward pressure might fade with time. But not all of it. “Tariffs are highly likely to generate at least a temporary rise in inflation,” he said. “The effects could also be more persistent.”
So far, policymakers are keeping their cool. But as the fallout from trade policy grows more tangible, the balancing act between price stability and growth becomes less theoretical and more immediate.
Tariffs Fuel Inflation and Stagflation Risk
Powell may have kept his tone calm, but cracks within the Federal Open Market Committee are starting to show. Fed Governor Christopher Waller made it clear this week that he’d back sharper and faster rate cuts if growth falters, even if inflation stays stubbornly high. Meanwhile, Minneapolis Fed President Neel Kashkari is holding the line on price stability, warning against any premature easing.
This emerging divide reflects a broader dilemma for the central bank: how do you respond when tariffs threaten both higher inflation and weaker demand? It’s the kind of scenario that forces uncomfortable trade-offs, not tidy consensus.
Powell acknowledged the complexity head-on. He made it clear that future decisions would depend not just on where inflation and employment stand today, but how far each remains from the Fed’s targets and how long they’re expected to take to get back in line.
Fed Officials Split Over Rate Cuts vs Inflation
The latest round of data hasn’t made life any easier for the Fed. The labour market is still holding up, and inflation edged slightly lower in March. But just as policymakers might have started breathing easier, short-term inflation expectations have crept higher again, thanks in large part to renewed tariff anxiety. Meanwhile, business and consumer sentiment have slumped, never a great sign when you’re scanning for cracks in demand.
Growth figures aren’t offering much in the way of reassurance either. First-quarter GDP is now expected to come in flat or marginally negative, with a surge in pre-tariff imports distorting the picture. Despite these headwinds, Powell insists the U.S. economy remains in a “solid position” and continues to emphasise the Fed’s patient, data-dependent approach.
Markets, for their part, aren’t waiting around. Futures are now pricing in a full rate-cut cycle starting in June, with at least four quarter-point reductions expected by year-end. The signal from investors is clear enough: inflation may be sticky, but recession risk is starting to stick harder.
