In ‘challenging scenario,’ Fed chair leans toward fighting rising prices

Federal Reserve Chair Jerome Powell speaks at the Economic Club of Chicago on Wednesday.

The Federal Reserve could face the “challenging scenario” of rising inflation at the same time the U.S. labor market is weakening, Fed Chair Jerome Powell said Wednesday.

Congress has given the Fed two goals: stable inflation and low unemployment. But since 2021, the Fed has only faced one of those concerns, combatting higher inflation as the labor market has been solid.

In a speech in Chicago on Wednesday, Powell said President Donald Trump’s tariffs were larger than had been expected. This means the effects of higher inflation and slower growth will also hit the economy harder.

“Tariffs are highly likely to generate at least a temporary rise in inflation. The inflationary effects could also be more persistent,” Powell said.

At the same time, economists are also downgrading their forecasts for the U.S. economy for the full year, Powell noted. Most are pointing to continued slowing, but not a recession.

The Fed chair said the central bank could wait and see how things develop before adjusting interest rates.

“For the time being, we are well-positioned to wait for greater clarity before considering any adjustments to our policy stance,” Powell said in remarks to the Economic Club of Chicago.

The phrase “for the time being” was added to similar language the Fed chair used in a previous speech on April 4.

He stressed the Fed’s inflation fight, saying the central bank had an “obligation” to keep the public from coming to expect years of higher inflation.

”Without price stability, we cannot achieve the long periods of strong labor-market conditions that benefit all Americans,” he said.

Financial markets didn’t like Powell’s tough talk on inflation, which implies the central bank is comfortable waiting for more clarity on where tariffs will shake out before cutting rates.

“Powell’s bottom line was that the Fed is waiting to see what the policies are before they can determine the economic effects. This is truly a patient central bank,” said Jennifer Lee, economist at BMO Capital Markets.

Less than two weeks ago, the blue-chip Dow Jones Industrial Average shed over 2,000 points to join othermajor stock indexes in correctionterritory after Powell said there seemed to beno “hurry”to cut rates, despite deep uncertainties around polices from the White House.

Economists have observed that most Fed speakers have delivered “hawkish” messages about the importance of keeping inflation expectations anchored. Many economists don’t expect the Fed to cut rates until the end of the year. Traders in derivative markets, concerned about a possible recession, have priced in four quarter-point cuts by the end of the year.

Minneapolis Fed President Neel Kashkari and Boston Fed President Susan Collins have suggested a higher bar for any rate cuts, given how tariffs might impact the public’s views on inflation.

Fed Governor Chris Waller was a dovish exception, spelling out conditions where it would appropriate to cut rates, said Amy Yang, an economist at Deutsche Bank.

Former Dallas Fed President Robert Kaplan said Powell is trying to convey that he is going meeting-by-meeting and keeping his options open. While a move in May is not in the cards, a spike in unemployment could change their minds later this summer, Kaplan said.

“They are going to have to see [a spike] first and analyze it before they act,” he said in an interview on CNBC.