Tariifs Will Trigger Higher Inflation, Slower Economic Growth, Warns Fed Chief
Chicago: Fed Chair Jerome H. Powell on Wednesday said the level of the tariff increases announced so far is significantly larger than anticipated.
The increase in tariffs is likely to be true of the economic effects, which will include higher inflation and slower growth, Powell warned.
On the outlook for the US economy and monetary policy, Fed chairman said: "We are always focused on the dual-mandate goals given to us by Congress: maximum employment and stable prices. Despite heightened uncertainty and downside risks, the US economy is still in a solid position. The labour market is at or near maximum employment. Inflation has come down a great deal but is running a bit above our 2% objective.
"As we gain a better understanding of the policy changes, we will have a better sense of the implications for the economy, and hence for monetary policy."
Powell said Fed will get the initial reading on first-quarter GDP in a couple of weeks. The data in hand so far suggest that growth has slowed in the first quarter from last year's solid pace.
Despite strong motor vehicle sales, overall consumer spending appears to have grown modestly. In addition, strong imports during the first quarter, reflecting attempts by businesses to get ahead of potential tariffs, are expected to weigh on GDP growth.
Tariffs are highly likely to generate at least a temporary rise in inflation. The inflationary effects could also be more persistent. Avoiding that outcome will depend on the size of the effects, on how long it takes for them to pass through fully to prices, and, ultimately, on keeping longer-term inflation expectations well anchored.
Fed's obligation, he said, is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem. As we act to meet that obligation, we will balance our maximum employment and price-stability mandates, keeping in mind that, without price stability, we cannot achieve the long periods of strong labour market conditions that benefit all Americans. We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension. If that were to occur, we would consider how far the economy is from each goal, and the potentially different time horizons over which those respective gaps would be anticipated to close.
"We continue to analyze the incoming data, the evolving outlook, and the balance of risks. We understand that elevated levels of unemployment or inflation can be damaging and painful for communities, families, and businesses. We will continue to do everything we can to achieve our maximum-employment and price-stability goals," Powell added.
Surveys of households and businesses report a sharp decline in sentiment and elevated uncertainty about the outlook, largely reflecting trade policy concerns. Outside forecasts for the full year are coming down and, for the most part, point to continued slowing but still positive growth.
Fed is closely tracking incoming data as households and businesses continue to digest these developments.
In the labour market, during the first three months of the year, non-farm payrolls grew by an average of 150,000 jobs a month. While job growth has slowed relative to last year, the combination of low layoffs and lower labour force growth has kept the unemployment rate in a low and stable range. Meanwhile, the ratio of job openings to unemployed job seekers has remained just above 1, near its pre-pandemic level. Wage growth has continued to moderate while still outpacing inflation. Overall, the labor market appears to be in solid condition and broadly in balance and is not a significant source of inflationary pressure.
As for our price-stability mandate, inflation has significantly eased from its pandemic highs of mid-2022 without the kind of painful rise in unemployment that has frequently accompanied efforts to bring down high inflation. Progress on inflation continues at a gradual pace, and recent readings remain above our 2 percent objective.
Estimates based on data released last week show that total PCE prices rose 2.3% over the 12 months ending in March and that, excluding the volatile food and energy categories, core PCE prices rose 2.6%.
The new US administration is in the process of implementing substantial policy changes in four distinct areas: trade, immigration, fiscal policy, and regulation. Those policies are still evolving, and their effects on the economy remain highly uncertain. As we learn more, we will continue to update our assessment" Fed chief said.
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