Federal Reserve Chairman Jerome H. Powell said the central bank is focusing on the “net effect” of President Trump's sweeping economic agenda amid high uncertainty about which policies will actually be enacted, as officials repeatedly said they are still “in a hurry” to adjust interest rates.
“Analyzing incoming information focuses on separating signals from noise as the outlook evolves,” Powell said at an event Friday. “We don't have to hurry, we're in a good position to wait for it to become clearer.”
If inflation remains sticky but the economy remains strong, the Fed chair said the central bank could “may maintain policy restraint for longer.” But if the labour market is weaker than expected or inflation drops rapidly, Powell said officials can “easy policies accordingly.”
His comments underscore the delicate balancing act the Fed is trying to navigate in tensile moments for the economy.
At the same event Friday, Fed Gov. Michelle Bowman said labor markets and economic activity would be “a bigger factor” in policy debate once inflation returns to the central bank's 2% target.
The Fed is expected to stabilize interest rates between 4.25% and 4.5% when staff gather between March 18th and 19th, with the first suspension since January being extended. But decisions from then on can be more difficult, especially when the economy weakens and price pressures rise to the extent that economists fear.
It is still unknown how important Trump's tariffs will affect the economy. The president has already messed up the taxes he placed in Mexico and Canada this week, but continues to keep the threat alive by issuing only short-term graces. Like other penalties on aluminum, steel and other products, sweep retaliation tariffs are still on the table. The scale of potential impacts depends not only on the duration of the policy, but also on how other countries eagerly protect themselves with retaliatory measures, and how businesses and consumers adapt to higher costs.
The Fed must consider these implications along with other policies Trump is pursuing. This includes massive deportation and sudden reductions in government spending. Tax cuts and deregulation efforts that form other parts of the president's economic agenda may serve as offsets and help to strengthen business activities, but to what extent is unknown.
What gives Fed officials a degree of comfort is the solid foundation of the economy that Trump inherited. In fact, new data released on Friday showed employment stability in February as unemployment rates reached up to 4.1%. Its ruggedness may mean that the economy needs a huge blow to plunge into a recession.
Still, volatility alone is enough to raise concerns about the economic outlook, and measures to track consumer sentiment suggest that there has been a major deterioration in how confident Americans are. Many economists have also lowered forecasts of growth, and policymakers are also attracting attention.
Philadelphia Fed President Patrick T. Harker warned on Thursday that unemployment is still low and the economy is still growing, but “this poses a threat.”
“We are beginning to see our confidence is beginning to fade,” he said at an event hosted by the regional bank.
Pointing to recent measures of sentiment and other “soft data,” Fed Gov. Christopher J. Waller added Thursday that these gauges suggest that “thing's not that good on the real side of the economy.”
But on Friday, Powell called for a more positive tone, saying, “Despite the high levels of uncertainty, the US economy remains in a good place.” On the other hand, sentiment data “has not been a good predictor of consumption growth in recent years.”
Growth is scary as Americans are also prepared for rising consumer prices. This is a toxic combination that makes the Fed's job even more difficult.
After failing to spot the pandemic-era inflation problem quickly enough, the Fed is careful not to make the same mistake again, as price pressures from that episode still remain. Since Trump was re-elected, central bank officials have raised forecasts for inflation that year, and most recently elicited a direct link to the president's policies.
Powell pointed to consumers who are raising expectations about inflation, who cited tariffs as “driving factors.”
Earlier this week, New York Fed president and Powell's top alley John C. Williams said he hopes that their effects will “filter the prices consumers pay,” so tariffs will blow away higher inflation.
Even Waller, who previously said the Fed could “see” and “see” the effects of tariffs, acknowledged Thursday that the risks of recent taxes were “a lot greater” than he originally anticipated.
The latest Beige Book released by the Fed this week tracks economic situation around the country, showing that businesses are embellished in the same way. Most surveyed in the 12 districts that make up the Federal Reserve said they plan to raise prices as a result of tariffs.
Against this backdrop, authorities have consistently supported Fed holders' interest rate cuts until more evidence appears until more evidence shows that inflation is becoming unexpectedly weaker in the central bank's target or labor market.
Financial markets bet that these conditions will be met by the June meeting, allowing the Fed to lower this year by 0.75% points.
