Powell shows hawkish stance again: Difficulty in stabilizing employment if inflation does not fall, reiterates the Fed's wait-and-see position.

Federal Reserve Chairman Powell once again emphasized the need for the central bank to ensure that tariffs do not lead to a more persistent rise in inflation. Powell stated on Wednesday at the Economic Club of Chicago, "Our responsibility is to anchor long-term inflation expectations and ensure that a one-time increase in prices does not evolve into a sustained inflation problem." Powell said policymakers will balance the dual responsibilities of promoting full employment and stabilizing prices, "Remember, without price stability, we can't achieve the strong labor market conditions that benefit all Americans." Morgan Stanley's Chief U.S. Economist Michael Feroli, in a report to clients, said these comments position price stability as a "prerequisite" for sustainable achievement of the Fed's employment mandate. Feroli stated, "By continuing to focus on inflation issues within the Fed's mandate, Powell is again resisting market pricing expectations for a rapid monetary policy response to signs of deteriorating growth prospects." These remarks reinforce Powell's repeated views, including recent comments on April 4 emphasizing that Fed officials are not eager to change the central bank's policy rate. Washington LH Meyer/Monetary Policy Analytics economist Derek Tang urged people to note Powell's comments, stating that the Fed must "ensure" that tariff-driven price increases do not fuel long-term inflation. Tang said, "'Ensure' is a very, very interesting word. Because certainty is a high standard." Bloomberg Economics economist Chris G. Collins said, "These comments indicate that while waiting for clearer information on how government policies will affect the economy, the Fed will prioritize the inflation aspect of its dual mandate." As they seek clearer insights into how Trump's economic policies - especially trade policies - will impact the U.S. economy, Powell and other Fed policymakers have expressed support for maintaining stable interest rates. Maintaining stability Powell said, "We're in a good place right now to wait and see for more clarity before considering changing policy stance." During a Q&A session after his speech, Powell said he expects "both unemployment and inflation, as the year goes by, to return to the vicinity of our targets." The Fed chair acknowledged that economic weakness and rising inflation could eventually create a challenge for the central bank's twin goals. He said, "We may find ourselves, in a challenging situation with the dual-mandate goals somewhat in conflict. If that happens, we'll weigh the shortfalls in the economy versus each of our goals and the different time horizons it might take to close those shortfalls." Powell also commented on recent market turbulence, emphasizing that market operations are "fundamentally normal." He said, "There's a lot of uncertainty in the market, which means volatility, but even so, markets are functioning normally." He added, "Markets are doing what they're supposed to do, they're orderly." Trump continues to significantly alter his plans for imposing new tariffs, causing anxiety among businesses, consumers, and global financial markets. After announcing a so-called reciprocal tariff plan on April 2 that roiled markets, he delayed the plan. He pushed forward with plans for global tariffs of 10% and tariffs exceeding 100% on China, then sent mixed signals on exemptions for smartphones and other tech products. He also imposed tariffs on imports of cars, steel, and aluminum, and hinted at the pharmaceutical and semiconductor industries as potential targets. Many analysts estimate that tariffs will push up inflation and slow economic growth, a view echoed by Powell. As measured by a gauge favored by the Fed, inflation stood at 2.5% for the past year as of February, a sharp decline from its post-COVID peak, but stubbornly above the Fed's 2% target. Powell said in his speech that he expects the gauge to fall to 2.3% in March. Inflation expectations Powell reiterated on Wednesday that the magnitude of announced tariff hikes has been significantly higher than expected. He added that tariffs are likely to at least temporarily push inflation higher but the inflationary effects could be more persistent. He said, "Avoiding that outcome will depend on the size of the effects, the time it takes for these effects to fully pass through to prices, and ultimately on anchoring long-term inflation expectations." By the end of 2024, Fed officials cut rates three times in a row, but in 2025 began to signal a more patient approach in the face of sticky inflation. Many officials further emphasized the need to minimize the risks of tariffs driving sustained inflation and long-term expectations of price growth among Americans. Meanwhile, layoffs and the unemployment rate stood at 4.2% in March, still at low levels. U.S. employers added 228,000 jobs last month, exceeding expectations. Powell said the Fed is far from stopping the reduction of its balance sheet and added that reserves remain ample. He noted that the slowdown in balance sheet reduction means the Fed can continue to shrink its asset portfolio for a longer period of time.