A soft landing from inflation may still be in sight, but when Federal Reserve Chair Jerome Powell speaks in New York on Friday he will be facing a tangled set of new risks to that long-sought goal, from a global trade war that could reignite price pressures to hints public expectations may be shifting in a bad way for the U.S. central bank.
Powell will deliver his remarks to an economic conference just ahead of the communications blackout for the Fed’s March 18-19 policy meeting. It will be his chance to publicly assess the still-developing economic impact of the expansive tariffs President Donald Trump has slapped on imports from major U.S. trading partners, with more expected, the new administration’s efforts to downsize the federal government and contract spending, and stricter immigration rules.
While the policy changes have happened too recently and too fast to be seen much in data outside of daily swings in stock, bond and currency markets, taken together they have brought the risk of “stagflation” back as a talking point among forecasters.
Some of Powell’s fellow policymakers have warned the Fed may soon face tough choices between continuing to lean against above-target inflation or bolstering economic growth and jobs with interest rate cuts.
After downplaying the impact of tariffs as likely having only a short-lived, one-off impact on prices, the sweep of Trump’s new and threatened import taxes on Canada, Mexico and China, their potential to alter business and household behavior, and the retaliation already in motion by these trading partners may make that stance difficult to maintain.
“The Fed’s not here to set trade policy or tax policy. The government can do whatever it wants,” said Adam Posen, a former Bank of England policymaker who is president of the Peterson Institute for International Economics in Washington.
But at this point the Fed “should be much more explicitly stating, based on all available mainstream evidence, it is more likely than not the tariffs will be inflationary … They’re starting from a position where inflation risks are not low.”
Powell is scheduled to speak at 12:30 p.m. EST (1730 GMT) to an annual monetary policy forum organized by the University of Chicago’s Booth School of Business.
The Fed is widely expected to hold its benchmark policy rate steady in the 4.25%-4.50% range at its upcoming meeting. New policymaker forecasts, however, will provide a measure of how deeply the first weeks of the Trump administration have changed the outlook among U.S. central bankers about the economy and appropriate monetary policy.
Line graph showing various measures of inflation and the Federal Reserve’s policy rate of interest.
‘WHERE HIS HEAD IS’
The U.S. employment report for February, due to be released four hours before Powell speaks, will add to policymakers’ sense of whether the economy remains in what some of them have called a “sweet spot” of declining inflation and low unemployment, or if weaknesses are starting to show.
A report from outplacement firm Challenger, Gray & Christmas on Thursday showed the highest number of announced job cuts in nearly five years, led by a surge in federal government firings under Trump. New unemployment benefits claims by ex-federal workers shot up to a four-year high in late February, a separate report from the Labor Department showed, with concern about ripple effects for government contractors soon to follow.
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There is ample ambiguity. Stock markets that hit record highs in February have sold off sharply following Trump’s introduction of tariffs. Consumer spending dropped unexpectedly in January and major U.S. retailers are warning of a weak 2025. Economists, meanwhile, still expect there were solid job gains last month, with a jobless rate holding at a historically low 4.0%.
Some surveys of inflation expectations, something the Fed monitors closely, showed them starting to rise; market-based rates on Treasury Inflation-Protected Securities, by contrast, fell after the tariff announcements, as did yields on other Treasury bonds, as concerns about U.S. growth took hold.
Investors for now are betting an expected economic slowdown will offset the price impact of tariffs, keep inflation in check, and lead the Fed to deliver three quarter-percentage-point rate cuts this year – more than the two Fed policymakers projected in December.
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But the cross-currents may be difficult to read, and, if Trump’s tariffs spool out as promised, it may take months for the impact to be fully seen in prices and then in broader inflation data.
That risk may now keep the Fed on hold, particularly until it is clear that the public’s outlook for inflation also remains stable. If that were to begin climbing, Fed officials have recently made clear that all bets are off, with references to former Fed chief Paul Volcker’s inflation-fighting efforts of the early 1980s creeping back into policymakers’ remarks.
The message: If inflation rekindles, and especially if the public outlook about coming price increases starts to move higher, the Fed won’t have the luxury of balancing its inflation goal with concerns about employment, but will have to do what’s needed to keep price pressures in check.
Tani Fukui, senior director of global economic and market strategy for MetLife Investment Management, said if Powell could clarify one thing in his remarks, it would be his view about how recent developments “are or are not supporting inflation expectations.”
“Until now, I’ve been pretty sanguine about it in terms of, oh, it’s consumers. Consumers look at egg prices and they get mad,” Fukui said. But with recent survey and anecdotes pointing to price increases in the pipeline, and the drumbeat of news about Trump’s tariff plans, “I’d like to get a better understanding of where his head is.”
