Jerome Powell says Trump’s tariffs are a threat to inflation and jobs

Jerome Powell, in unusually candid, almost provocative, remarks at the Economic Club of Chicago, made it clear that President Donald Trump’s controversial policies will have significantly greater negative effects on the economy than the Federal Reserve Board he chairs expected.

His comments, in which he also effectively ruled out responding to the turmoil in financial markets, triggered a sell-off in the US sharemarket, with the S&P 500 falling 2.2 per cent and the technology-oriented Nasdaq index 3.2 per cent.

Federal Reserve chairman Jerome Powell, at an event hosted by the Economic Club of Chicago, has ruled out responding to the turmoil in financial markets.Credit: AP

Powell had previously adopted a cautious, wait and see, stance when discussing the Trump policies so the sudden shift in tone – and the knowledge that his comments will most likely induce an aggressive response from Trump, with whom he has had a testy relationship – was an indicator of the depth of the Fed’s concerns about the administration’s policies and their chaotic implementation.

Powell said the administration was in the process of implementing substantial policy changes in four distinct areas: trade, immigration, fiscal policy and regulation.

“Those policies are still evolving, and their effects on the economy remain highly uncertain,” he said.

“The level of the tariff increases announced so far is significantly larger than anticipated. The same is likely to be true of the economic effects, which will include higher inflation and slower growth.”

Tariffs were likely to generate at least a temporary rise in inflation and the inflationary effects could also be more persistent, he said.

If forced to choose between inflation and growth, the Fed is likely to prioritise combating inflation.

What he was depicting – the combination of materially higher inflation and materially lower growth – is stagflation and the toughest of choices for the Fed, which would need to decide whether to combat inflation with higher interest rates or stimulate growth and protect employment with lower rates.

Powell provided a hint of how the Fed would respond.

“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.

“As we act to meet that obligation we will balance our maximum-employment and price-stability mandates, keeping in mind that, without price stability, we cannot achieve the long periods of strong labour market conditions that benefit all Americans.”

In other words, if forced to choose between inflation and growth, the Fed is likely to prioritise combating inflation.

That’s not what Trump wants to hear. He has been calling for the Fed to lower interest rates immediately, accusing Powell of “playing politics” by leaving them unchanged.

Powell said that the Fed would never be influenced by any political pressure and that its independence was “a matter of law”.

“People can say whatever they want, that’s fine. That’s not a problem. But we will do what we do strictly without consideration of political or any other extraneous factors,” he said.

He did, however, acknowledge that the Fed is keeping a close eye on a case that’s now before the US Supreme Court in which the Trump administration is arguing that a 1935 precedent that prevented Franklin Roosevelt from sacking members of the Federal Trade Commission should be overturned.

Fed governors can only be removed for “cause”, not for making decisions that upset the government of the day.

If the court were to overturn the 1935 ruling, the Fed’s independence could be threatened, which would add another substantial layer of risk to US financial markets that, thanks to the disruption and uncertainty caused by Trump’s policies, particularly his tariffs, are already laden with risk.

Powell outlined some of the effects of the on-again, off-again tariffs which, for the moment, have raised the average US tariff rate from 2.5 per cent to about 25 per cent, their highest rate in almost a century.

US President Donald Trump has been calling for the Fed to lower interest rates immediately, accusing Jerome Powell of “playing politics” by leaving them unchanged.Credit: Getty

Businesses and investors would pull back if clarity about the future weren’t restored; if the US were to become a jurisdiction where risks are structurally higher, it would be less attractive; cuts to research could have implications for economic growth, productivity and health.

“The effects are likely to move us away from our goals. Unemployment is likely to go up as the economy slows in all likelihood, and inflation is likely to go up as tariffs find their way and some parts of those tariffs come to be paid by the public. So, that’s the strong likelihood.”

What the Fed can’t know in advance is whether the impact of the tariffs on inflation will be temporary or persistent.

Trump has placed tariffs on goods the US doesn’t or can’t produce. Where it does have domestic production, experience suggests US companies will take advantage of the protection provided by the tariffs to raise their prices.

So, there are going to be price rises, in some cases very substantial ones. Tariffs are a tax on the consumers of the economy that imposes them, so they will have negative impacts on US growth.

Trump’s trade war is a brutal assault on global trade and the increasingly complex global supply chains that have supported the growth in global trade over decades.

The abruptness of that assault, with punitive tariffs announced and implemented within days, hasn’t given anyone time to adjust and develop new sourcing.

It is a shock akin to the supply chain disruption and chaos that ignited inflation in the US and other developed economies following the COVID-19 pandemic.

Powell referred to that post-pandemic experience, citing the car industry as an example of how the industry and its supply chains could be significantly disrupted by the tariffs.

“You would worry that that process will take some years and that the inflationary process might be extended,” he said.

“When you think about supply disruptions, that is the kind of thing that can take time to resolve and it can lead to what would’ve been a one-time inflation shock to be extended, perhaps more persistent.”

Adding to the uncertainty and exacerbating volatility in financial markets has been the chaotic way the tariffs have been implemented, with pauses, exemptions, allusions to more tariffs overlaid on a nonsensical formula for Trump’s “reciprocal” tariffs that is based on the false premise that all trade deficits are the result of unfair trade practices.

The chaotic way the tariffs have been implemented has added to uncertainty and volatility for financial markets.Credit: Bloomberg

Powell doesn’t seem fazed by the extent of the dive in sharemarkets, increase in bond yields and the tumbling value of the US dollar (which will also feed into higher inflation), even though the gyrations in markets are adding to uncertainty and undermining investor, business and consumer confidence, with implications for business investment and employment.

He said financial markets were “orderly and functioning as you would expect them to in times of high uncertainty”, while also warning of continued volatility. In other words, the Fed isn’t going to intervene or lower interest rates to put a floor under the markets.

Instead, it will wait for the dust to settle from the blizzard of policy announcements flooding out of the White House (assuming it ever does settle) and for their effects on the economy to emerge.

“As that great Chicagoan, Ferris Bueller, once noted, life moves pretty fast,” Powell said, in one of the rare light moments in an otherwise sombre performance.

That’s very true of the Trump administration, which is moving, albeit haphazardly, at a frenetic pace and breaking a lot of things, probably including the US economy, in the process.

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