In a speech overnight, Fed Chair Jerome Powell pointed to substantial changes underway, by US administration, in trade, immigration, fiscal policy, and regulation—all of which are still “evolving” and difficult to assess in terms of economic impact.
In particular, Powell acknowledged that the scale of tariff increases already announced is “significantly larger than anticipated,” and warned that the resulting economic effects will likely include “higher inflation and slower growth.”
Powell noted a clear rise in near-term inflation expectations, with both market-based breakevens and survey indicators moving up in response to the new tariff regime. While long-term expectations remain largely anchored, he cautioned that the inflationary impulse from tariffs could prove “more persistent” than initially thought. In the near term, tariffs are highly likely to generate “at least a temporary rise in inflation” .
Importantly, Powell acknowledged that Fed could face a scenario where its “dual-mandate goals are in tension.” In such a case, policymakers would need to carefully weigh how far the economy is from each objective, and over what time horizons those gaps might close.
