Federal Reserve Chair Jerome Powell on Wednesday warned that President Trump’s sweeping tariffs could push the U.S. economy into a scenario of higher inflation and slower growth, creating a difficult dilemma for the Fed.
Speaking in Chicago, Powell said, “We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension.” He noted that there is a “strong likelihood” the economy could drift away from both price stability and full employment for the remainder of 2025.
In such a case, Powell said the Fed would need to carefully assess how far the economy is from each goal and the timeframes over which those gaps might be expected to close, suggesting that interest rate policy may become harder to calibrate.
Turning to the recent spike in bond yields and turbulence in the Treasury market, Powell said markets are reacting to “a historically unique development,” referring to the April 2 “Liberation Day” tariff announcement. He expects “continued volatility” ahead.
He again defended the Fed’s independence, saying that it is protected by law and that he would not take actions based on political pressure. Powell addressed concerns that a pending Supreme Court case could expand the president’s power to remove leaders of independent agencies — a move some fear could threaten the Fed’s autonomy. “I don’t think that’s a case that will apply to the Fed,” he said, though he confirmed the central bank is “monitoring it carefully.”
Regarding inflation, Powell repeated points from his April 4 remarks, acknowledging that it’s not yet clear whether tariff-driven inflation will be transitory or persistent. That will depend on the magnitude of the effects, how long they take to feed through to prices, and whether long-term inflation expectations remain anchored.
The combination of slowing growth and accelerating inflation, often referred to as “stagflation,” presents a nightmare for policymakers, particularly if inflation remains sticky while job growth weakens. Powell’s comments signal a more cautious and data-dependent Fed stance going forward.
