US Federal Reserve Chairman Jerome Powell, on President Donald Trump’s call to “cut interest rates,” stated that the bank may find itself within a challenging scenario where inflation and employment goals are in tension. Powell also evaluated the impact of tariff increases in the US, mentioning, “These effects may include higher inflation and slower growth.”

Speaking at the Chicago Economics Club, Powell emphasized that despite increasing uncertainties and downward risks, the US economy is still in a solid position. He noted that the labor market is close to or at maximum employment levels, inflation has fallen significantly but is slightly above the 2% target. Powell highlighted significant policy changes in four areas in the new administration in the US, including trade, immigration, fiscal policy, and regulation, emphasizing that the economic effects of these policies remain uncertain.

Powell warned about the possible consequences of tariff increases, stating, “The level of tariff increases announced so far is much larger than expected. It is possible that these economic consequences may include higher inflation and slower growth.” He pointed out that surveys and market-based short-term inflation expectations have significantly increased, with survey participants attributing this rise to tariffs. Long-term inflation expectations from survey measurements appear mostly well anchored, while market-based inflation expectations continue to hover close to 2%.

Powell explained that as a better understanding of policy changes is gained, clearer opinions about their effects on the economy and thus monetary policy will be formed. He expressed concerns about tariffs leading to at least temporary inflationary increases, potentially having lasting effects. Powell stressed the importance of preventing this outcome from evolving into a persistent inflation issue, which depends on factors like the magnitude of the effects, the duration of full reflection in prices, and ensuring well-anchored long-term inflation expectations.

In balancing the maximum employment and price stability objectives, Powell emphasized, “We may find ourselves within a challenging scenario where our inflation and employment targets are in tension.” He mentioned that they continue to analyze incoming data, evolving outlook, and risk balance, stating that they are currently in a good position to wait for more clarity before considering any adjustments to their policy stance.

Highlighting that the data shows a slowdown in growth, Powell referred to the upcoming release of Gross Domestic Product (GDP) figures for the first quarter of the year. He pointed out that current data indicates a deceleration in growth from the robust pace of last year. Powell highlighted that consumer spending has shown modest growth overall, while the strong imports reflecting businesses’ efforts to overcome potential tariffs are expected to exert pressure on GDP growth in the first quarter.

Powell accentuated that surveys with households and businesses indicate a sharp decline in confidence and increased uncertainty regarding the outlook, largely reflecting trade policy concerns. He mentioned external forecasts for the year are declining, suggesting continued slowing growth, albeit remaining positive. Powell noted that the progress in lowering inflation is gradual, with recent readings showing inflation continuing to stay above the 2% target.

Regarding economic inquiries, Powell discussed the potential scenarios of increased unemployment due to economic slowdown and elevated inflation from customs duties, expressing his belief that there will likely be deviations from these goals for the rest of the year or at least no progress in them, followed by ongoing efforts to make progress in these areas. Powell indicated that resolving supply chain disruptions due to tariffs will take time and may extend a one-time inflation shock, perhaps making it more lasting.

Powell mentioned that markets are currently evaluating ongoing developments, particularly in policies, especially in trade policy, with the main question being where this will lead. He highlighted the high level of uncertainty markets are facing, leading to volatility. Powell noted that despite such challenging conditions, markets are operating as expected.

Stating that potential continued volatility is expected in the bond market, Powell noted that it is still too early to say exactly what is happening, as markets are trying to digest unprecedented developments and a high level of uncertainty. He affirmed that reserves are strong and mentioned that they are not close to stopping reducing the balance sheet. In response to a question about being ready to supply dollars to global central banks in the event of a dollar shortage, Powell unequivocally answered, “Absolutely.”