Powell: Tariffs will raise inflation but the Federal Reserve will not cut interest rates for now

The Chairman of the Federal Reserve, Jerome Powell, stated that although the expected new tariffs would raise inflation and lower economic growth, the central bank would not adjust interest rates until a clearer assessment of the final impact is available.

In a speech at the Arlington Business Editing and Writing Promotion Association annual meeting in Virginia on Friday, April 4th, Powell highlighted the “highly uncertain outlook” facing the Federal Reserve following President Trump’s announcement of a new round of reciprocal tariffs.

Powell acknowledged that the current performance of the U.S. economy remains strong, but he also emphasized the risks posed by tariffs and noted that the Fed will focus on controlling inflation. “Our mission is to ensure stable long-term inflation expectations and to ensure one-time price increases (referring to tariffs) do not evolve into sustained inflation issues,” Powell said in his speech.

“We have ample space to wait for clearer information before considering adjusting our policy stance. It is still too early to determine the appropriate path for monetary policy,” he added.

Prior to Powell’s remarks, President Trump had called for a rate cut, citing a decline in inflation. Trump wrote on the social media platform “Truth Social,” urging Powell to reduce rates, stating, “Now is the best time for Federal Reserve Chairman Powell to cut rates.”

Trump also expressed that energy prices, interest rates, inflation rates, even egg prices dropping by 69%, along with rising employment rates within two months, were all signs of a significant victory for the U.S. He advised Powell not to “play politics” and to lower rates promptly.

Following Trump’s announcement of a 10% tariff on all imported goods and higher retaliatory tariffs on certain key trading partners on Wednesday, Wall Street experienced a sell-off on Thursday.

On Friday, Beijing announced retaliatory measures against the U.S. and initiated investigations into several American companies, causing market turmoil once again.

Powell remarked that the new tariffs announced by the Trump administration were “beyond expectations.” “The impact on the economy could be significant, including increasing inflation and slowing growth,” he said. The scale and duration of these effects remain uncertain.

Although tariffs are likely to lead to a temporary increase in inflation, Powell explained that their impact could be more lasting. Avoiding such outcomes will depend on controlling long-term inflation expectations effectively while considering the size of the effects and how long it will take for them to fully transmit to prices.

Despite Powell’s cautious approach on how the Fed will respond to these changes, investors are still betting on the Fed cutting rates as soon as June, with four rate cuts expected throughout the year.

George Bory, Chief Investment Strategist of the Fixed Income Team at Allspring Global Investments, stated on Thursday, “The Federal Reserve does indeed have significant firepower to help the markets.” He added that the market is now anticipating more rate cuts and hopes for an early start. Bory suggested that the Fed’s policy could become more accommodative in June, and even a rate cut in May is possible.

In February, the U.S. core inflation rate was 2.8%, part of an overall easing pattern but still well above the Fed’s 2% target.

Despite increasing concerns about tariffs, Powell also expressed some optimism, noting that the economy is currently in “good shape,” with a robust labor market.