Federal Reserve Chairman Jerome Powell said that the turbulent trade war waged by U.S. President Donald Trump could put the Fed in a difficult position it hasn't faced in nearly half a century.
The central bank's chairman, in prepared remarks for an event hosted by the Economic Club of Chicago, said, 'The level of announced tariff increases so far is much larger than expected; we may find ourselves in a difficult position where our dual-mandate goals are strained.'
The Federal Reserve is responsible for promoting full employment and controlling inflation, but Trump's tariff fees threaten both goals.
However, the U.S. economy is still in a good position currently, according to the latest data, allowing the Federal Reserve to be patient.
The Fed's stance will remain steady.
Powell said that the best step for the Federal Reserve at the moment is to remain steady until the data clearly shows how the U.S. economy is responding to Trump's policies.
Other officials at the Federal Reserve have said this in speeches they delivered recently, stating that they can change interest rates in either direction, depending on the needs of the economy.
But it's only a matter of time before Trump's tariff fees exacerbate inflation, raise unemployment rates, and weaken economic growth, according to most economists, especially if the massive 'reciprocal' tariffs that briefly took effect on April 9 are reinstated, which Trump postponed until July.
So far, Trump has imposed a 25 percent tariff on aluminum and steel, a 25 percent tariff on non-compliant goods coming from Mexico and Canada under the free trade agreement; massive tariffs of 145 percent on Chinese imports, and 25 percent on cars, with separate tariffs on auto parts later, and a basic tariff of 10 percent on all U.S. imports.
The administration also granted temporary exemptions for some electronic goods, and Trump stated that separate tariffs on semiconductors, drugs, copper, and lumber are likely to be imposed.
The Fed's priority is inflation at the expense of recession.
The Federal Reserve may face a challenge it hasn't dealt with in decades, and looking back to the 1970s and early 1980s, the U.S. economy experienced periods of high unemployment and double-digit inflation, a troubling combination known as 'stagflation.'
At that time, under the leadership of Federal Reserve Chairman Paul Volcker, the U.S. central bank prioritized fighting inflation, even if it meant inflicting some damage on the economy.
The U.S. economy appears to be heading in this direction, according to most forecasts, but it is unclear whether it will reach this point exactly or not.
Chicago Federal Reserve Bank President Austin Goolsbee said last week at an event in New York that Trump's tariffs put the central bank in the same difficult position.
He added, 'Tariffs are like a negative supply shock; they are a stagflation shock, meaning they exacerbate both sides of the Fed's dual mandate at the same time.'
He added, 'Prices are rising while jobs are lost and growth slows, and there is no general action plan for how the central bank should respond to a stagflation shock.'
Powell said that if stagflation becomes a reality, 'we will look at how far the economy is from each goal and the different time horizons over which these gaps are expected to be closed.'
He confirmed, 'We understand that rising levels of unemployment or inflation can be harmful and painful for communities, families, and businesses.'
Many Federal Reserve officials have stated that the central bank should closely monitor people's views on prices, which have deteriorated based on a consumer survey conducted by the University of Michigan that is closely followed.
It is unclear when rising inflation expectations will prompt the Federal Reserve to take any action, and what those actions will be.
Although inflation is much lower than its peak in four decades reached in June 2022, it is still slightly above the Federal Reserve's 2 percent target, meaning the Fed has less reason to resume cutting interest rates.
But for now, it seems that most officials agree that it is better to wait for any evidence to emerge in the data.
Beth Hammack, president of the Federal Reserve Bank of Cleveland, said on Wednesday during an event in Columbus, Ohio: 'This is a set of risks that monetary policy has a hard time dealing with.'
She added, 'Given the starting point of the economy, and with both sides expected to come under pressure, there is a strong case for keeping monetary policy steady to balance the risks posed by ongoing high inflation and a slowing labor market.'