Fed Chair Powell Hints at Stagflation as Tariff Uncertainty Looms — Evening Brief – 04.16.25
Federal Reserve Chair Jerome Powell, in a speech at the Economic Club of Chicago on Wednesday, cautioned that the scale of recently announced tariffs exceeded the Fed’s expectations, signaling potentially significant economic consequences. The tariffs, described as “significantly larger” than anticipated, are poised to drive at least a temporary spike in inflation, with the risk of more sustained price pressures, according to Powell’s prepared remarks. This could lead to higher inflation and slower economic growth, complicating the Fed’s dual mandate of price stability and maximum employment.
Powell emphasized the Fed’s commitment to preventing tariff-induced price spikes from becoming entrenched, stating, “Our obligation is to keep longer-term inflation expectations well anchored and to ensure a one-time price level increase does not evolve into a persistent inflation problem.”
He reiterated a cautious stance on monetary policy, echoing comments from April 4, that the Fed is not rushing to adjust its benchmark rate. “For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance,” Powell said, reflecting a wait-and-see approach amid trade policy uncertainties.
The remarks highlight a potential tension in the Fed’s dual mandate. Powell suggested that if tariffs lead to both higher inflation and slower growth—a scenario hinting at stagflation—the Fed would weigh the economy’s distance from each goal and their respective timelines for resolution. This marks a nuanced shift, as it’s the closest Powell has come to acknowledging stagflation risks.
In contrast, Fed Governor Christopher Waller, speaking earlier this week, took a different tack. Waller indicated that in a scenario of rapid economic slowdown paired with elevated inflation, the risk of recession would take precedence over inflation concerns. He suggested that aggressive interest rate cuts might be necessary if tariffs significantly increase unemployment, highlighting a potential policy divergence within the Fed.
Other Fed policymakers, such as St. Louis Fed President Alberto Musalem, have adopted a more hawkish tone, focusing on rising short-term inflation expectations that could “seep” into longer-term expectations. This raises the possibility of maintaining high rates or even hiking them further if inflation persists, especially given recent market volatility and tariff-driven pressures.