Tariffs could put Fed’s inflation and jobs goals at odds, Jay Powell says

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Donald Trump’s tariffs could complicate the Federal Reserve’s ability to control inflation while also maximising employment, chair Jay Powell said, as he emphasised the central bank’s focus on price stability. 

The Fed chief said on Wednesday that while US rate-setters would aim to “balance” its inflation and full employment goals, they would need to remember that “without price stability, we cannot achieve long periods of strong labour market conditions”.

Powell said the president’s tariffs announced so far had been “significantly larger than anticipated”, adding that “the same was likely to be true of the economic effects, which will include higher inflation and slower growth”.

The Fed chair later added that those economic effects may place US rate setters “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,” Powell said in prepared remarks for a speech in Chicago.

The Fed’s dual mandate is to keep inflation at 2 per cent while promoting “maximum” employment levels.

Several Fed officials — including John Williams, head of the New York Fed, and governor Christopher Waller — have said inflation is likely to surge in the coming months on the back of the administration’s proposed tariffs.

While Waller thinks the impact of tariffs will prove shortlived, other members of the rate-setting Federal Open Market Committee which Powell chairs believe Trump’s tariffs have increased the odds that inflation will be a longer problem for US consumers.

Recent surveys have shown that consumers and businesses are expecting strong price rises in the near future as the new taxes on imports ripple through the economy.

The Trump administration’s policies have placed the Fed in “wait and see” mode, after the FOMC made a series of cuts over the second half of last year.

The US central bank has kept its benchmark federal funds target range at 4.25-4.5 per cent this year, with officials saying they are well-placed to respond once the economic data show the effects of the president’s policies on American businesses and households.