Investing.com -- Federal Reserve Chairman Jerome Powell signaled Wednesday that the Fed was focused on ensuring the impact of tariffs doesn’t manifest into an ongoing inflation problem at a time when trade tensions threaten to put the central bank’s stable inflation and maximum employment goals on a collision course.
"Our obligation 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," Powell said in prepared remarks at the Economic Club of Chicago.
The Fed chief flagged the importance of ensuring inflation remained under control, warning that "without price price stability, we cannot achieve the long periods of strong labor market conditions that benefit all Americans."
The Fed’s outlook on monetary policy has been muddied by the impact of tariffs that threaten the central bank’s goal of 2% inflation and maximum employment.
"We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension," Powell said. Under this scenario, the Fed’s monetary policy decisions 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," he added.
The tariff impact on the economy mount appears to be already leaving its mark. "The data in hand so far suggest that growth has slowed in the first quarter from last year’s solid pace," Powell said.
Despite the ongoing uncertainty, the labor market "appears to be in solid condition and broadly in balance and is not a significant source of inflationary pressure," he added.
Trump recently paused the reciprocal tariffs for 90 days after the bond market sounded the alarm bells as worry grew about a tariff-induced hit to the economy.
The tariffs blitz rolled out by President Donald Trump sent yields on the benchmark 10-year Treasury note and the 30-year Treasury soaring as investors demanded a higher risk premium for holding U.S. debt as concerns about over U.S. default inched higher.
Powell’s remarks paled in comparison to those from Fed Governor Christopher Waller, who on Monday said that if the impact of tariffs threatens a deep economic slowdown, then he would back a sooner rate cut even if it is accompanied by a jump in inflation.
“If the slowdown is significant and even threatens a recession, then I would expect to favor cutting the FOMC’s policy rate sooner, and to a greater extent than I had previously thought,” Waller said in a speech in St. Louis.