By Nick Timiraos

ARLINGTON, Va. -- Federal Reserve Chair Jerome Powell said the U.S. economy was likely to face a period of higher prices and weaker growth than seemed possible a few weeks ago because of larger-than-anticipated tariff hikes announced by President Trump.

His remarks carried an undercurrent of caution about how the central bank would be able to address any fallout because the central bank will want to ensure one-time price increases don't lead to persistently higher inflation.

In remarks prepared for delivery Friday, Powell indicated the central bank was still comfortable with its wait-and-see stance and that it was focused above all on ensuring the public expected price growth to slow down after any increases to tariffs.

While Powell acknowledged "downside" risks of weaker growth had increased, he said it was too soon to say how the central bank would adjust interest rates to cushion the economy from the blow of weaker global trade.

"While uncertainty remains elevated, it is now becoming clear that the tariff increases will be significantly larger than expected," and the economic fallout of higher prices and slower growth is also likely to be larger than expected, he said.

Fed officials are focused on what happens to the economy after the initial hit from higher taxes on imported goods have been absorbed. They pay particularly close attention to what consumers and businesses expect to happen to inflation over several years because they believe those expectations can be self-fulfilling.

Inflation surged in 2021 but it declined at the same time that the Fed sharply raised rates in 2022 and 2023. It fell to around 2.5% in February from more than 7% in 2022.

Economists expect inflation to rise by at least 1 percentage point this year as a full suite of tariffs announced Wednesday by President Trump take effect. Powell flagged the risk that inflation might remain somewhat elevated even after a temporary rise in prices.

"While tariffs are highly likely to generate at least a temporary rise in inflation, it is also possible that the effects could be more persistent," Powell said. Avoiding that outcome will depend on factors including the size of any price hikes and how long it takes the economy to absorb them, he said.

"Our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem," Powell said.

By focusing on inflation in his remarks, Powell underscored how officials believe they have less ability to pre-empt economic weakness caused by the tariffs. That means their attention could turn to how to cushion the blow from any increase in unemployment and slowdown in spending only after it occurs. In other words, the Fed would be responsive to any weakness but less able to pre-empt such weakness.

That would mark a notable contrast with how the Fed operated last year. Officials cut rates by a full percentage point between September and December to pre-empt a slowdown in hiring. They felt they had the room to do that because rates were near their highest level in two decades and inflation had declined considerably.

Write to Nick Timiraos at Nick.Timiraos@wsj.com

(END) Dow Jones Newswires

April 04, 2025 11:26 ET (15:26 GMT)

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