Federal Reserve Chair Jerome Powell warned on Friday that President Donald Trump's newly imposed tariffs are “larger than expected” and will likely bring greater-than-anticipated economic damage, including both higher inflation and slower growth. These developments have left the Fed in a complicated position as it tries to balance its dual mandate of maximum employment and stable inflation.
Powell, speaking at a business journalists’ conference in Arlington, Virginia, painted a picture of a “highly uncertain outlook” for the U.S. economy. He emphasized that both unemployment and inflation risks are now elevated—an unusual and troubling combination that undercuts the Fed’s usual policy tools. In normal times, the Fed would cut interest rates to combat rising unemployment, but that move could exacerbate inflation if price expectations become unanchored due to the tariffs.
In particular, Powell noted that the Fed’s top priority now is to prevent a surge in long-term inflation expectations, which can trigger a damaging cycle of price and wage increases. He stressed that it’s not the Fed’s role to comment on policy decisions like tariffs, but rather to assess and react to their effects on the economy.
Only weeks ago, the Fed had seen the U.S. economy in a “sweet spot” of falling inflation and low unemployment. But the rapid deterioration since the tariff escalation—including China’s 34% retaliatory tariffs, mineral export restrictions crucial to the tech industry, and curbs on U.S. agricultural imports—has shifted the outlook dramatically.
Powell said the central bank has time to wait and assess the full effects of these developments before adjusting policy, but markets believe action will come sooner rather than later. Traders now expect four rate cuts this year, up from three before Trump’s tariff announcement. If realized, this would be a dramatic shift in monetary policy, driven more by fears of economic contraction than inflation.
As it stands, Trump’s average tariff rates on imports could rise to around 27%, compared to just 2.5% at the end of the Biden administration. The economic consequences, according to Powell, are now clearly expected to be much more severe than initially anticipated.
In essence, Powell’s speech acknowledged that the Fed is being “engulfed” by a fast-moving economic storm—one that could push the U.S. closer to a recession, even as inflation pressures remain uncomfortably high.
