Jerome Powell warns Trump’s new tariffs may fuel inflation and slow growth, creating a dilemma for the Fed’s dual mandate.
In a recent speech, Federal Reserve Chairman Jerome Powell warned that President Trump’s newly announced tariffs could simultaneously drive inflation higher and hinder economic growth—a scenario that could significantly complicate the Fed’s interest rate policy decisions.
Dual Threat: Rising Inflation and Slowing Growth
Speaking Wednesday in Chicago, Jerome Powell, Chairman of the U.S. Federal Reserve, underscored the potential for Trump’s tariff measures to deliver a double blow to the economy—elevating inflation while dampening growth. He warned that such conditions could create one of the most challenging monetary policy dilemmas in recent history.
“We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension,” Powell stated, referring to the Fed’s legal obligation to maintain both price stability and maximum employment.
Economic Uncertainty and Difficult Policy Decisions
In a subsequent Q&A session, Powell noted the high probability that the U.S. economy may move away from both of the Fed’s core objectives in the remainder of 2025.
“For a time, we may be making little or no progress toward either goal,” he said. Powell described the prospect of such a divergence as requiring “a very difficult judgment,” explaining that the Fed would need to assess how far the economy is from each target and the timeline over which each gap might close.
Bond Market Volatility and Fed’s Response
Powell also addressed recent turbulence in the bond market, where yields have surged in response to the April 2 “Liberation Day” tariff announcement from former President Trump. The Fed Chair described the markets as functioning “in an orderly fashion,” but noted they are processing a historically unique event and warned of continued volatility.
“These reactions are to be expected in a period of heightened uncertainty,” he explained, while stressing the Fed is closely monitoring developments.
Reinforcing the Fed’s Institutional Independence
Amid growing political and legal scrutiny, Powell reaffirmed the legal independence of the Federal Reserve, saying, “That’s a matter of law,” and emphasized that no political pressure will influence the central bank’s decisions.
He referred to a case currently before the Supreme Court that questions the president’s power to remove board members from independent federal agencies. Although some observers fear this could have implications for the Fed, Powell was confident: “I don’t think that’s a case that will apply to the Fed. Still, we’re watching it closely.”
Conclusion: A Complicated Outlook for U.S. Monetary Policy
Powell’s comments highlight a period of deep complexity and uncertainty for U.S. monetary policymakers. With tariffs potentially fueling stagflation-like conditions—a mix of high inflation and sluggish growth—the Fed may find itself caught between competing objectives, with no easy path forward.
As markets digest these developments, the Federal Reserve is expected to adopt a cautious and data-driven approach, prioritizing independent judgment and measured action to maintain its credibility and fulfill its dual mandate in a shifting economic landscape.
