Federal Reserve chair Jerome Powell has warned that the central bank could face the “challenging scenario” of rising inflation coinciding with a weakening labour market, highlighting growing uncertainty over the US economic outlook.
Speaking at the Economic Club of Chicago on Wednesday, Powell said the inflationary effects of former President Donald Trump’s recently announced tariffs are likely to be “at least a temporary rise in inflation,” with the potential to become more persistent.
“Tariffs are highly likely to generate at least a temporary rise in inflation. The inflationary effects could also be more persistent,” he said.
Powell noted that while the US Federal Reserve is tasked with maintaining both price stability and low unemployment, it has primarily focused on taming inflation since 2021. However, slowing economic forecasts may soon require a balancing act.
“For the time being, we are well-positioned to wait for greater clarity before considering any adjustments to our policy stance,” Powell said, signalling a patient approach.
He reaffirmed the Fed’s commitment to controlling inflation, stating, “Without price stability, we cannot achieve the long periods of strong labor-market conditions that benefit all Americans.”
Markets reacted negatively to Powell’s remarks, which investors interpreted as reinforcing the Fed’s wait-and-see stance on interest rate cuts. “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.
While traders have priced in multiple rate cuts by year-end, several Fed officials remain cautious. Former Dallas Fed President Robert Kaplan warned that a significant rise in unemployment could force the Fed to reconsider. “They are going to have to see [a spike] first and analyse it before they act,” he said.