Powell: The hard data of the U.S. economy is very robust, and the "baseline" forecast still indicates that tariffs have a "temporary" impact on inflation

After the Federal Reserve announced to continue pausing interest rate cuts while raising inflation expectations and lowering economic forecasts, Fed Chairman Jerome Powell reiterated that the Fed does not need to rush to adjust its monetary policy stance, stating that it is fully prepared to patiently wait for clearer market information. "We believe now is a good time to wait for further clarification."

Powell pointed out that external surveys show tariffs driving inflation expectations; however, long-term inflation expectations are still in line with the Fed's 2% inflation target. He acknowledged that the likelihood of an economic recession predicted by outsiders has increased, but he believes this possibility remains at a moderate level, stating that the risk of recession "has risen somewhat, but is still not high."

Nick Timiraos, a senior Fed reporter known as the "new Fed correspondent," later commented that in recent weeks, under the headlines of the U.S. federal government's spending cuts and increased tariffs, domestic consumer confidence has significantly declined. Powell did not send a more aggressive signal regarding price increases possibly related to tariffs this time, which encouraged investors.

Long-term inflation expectations remain stable, allowing the Fed to overlook the impact of tariffs on inflation

On March 19, Wednesday, Eastern Time, at the beginning of the press conference following the Federal Open Market Committee (FOMC) monetary policy meeting, when asked how much of the Fed's increase in inflation expectations was caused by tariffs, Powell responded that it is difficult to analyze the extent to which inflation is driven by tariffs, but the Fed will try to clarify this:

"Clearly, a part of it, a good part of it comes from tariffs."

Powell stated that it is still too early to determine whether the initial inflation impact related to tariffs can be ignored. He pointed out that if long-term inflation expectations can be well controlled, the Fed can overlook one-time shocks from policies like tariffs.

Powell believes that the recent rise in inflation is largely related to tariffs but noted that long-term inflation expectations have stabilized, allowing the Fed to overlook it.

Powell reiterated that the Fed may cut interest rates in the event of unexpected weakness in the labor market or unexpected declines in inflation. If the inflation rate cannot continue to move toward the Fed's target of 2%, "we can maintain (monetary) policy restrictions for a longer time."

Powell said:

"As I mentioned, sometimes, if inflation would quickly disappear without us taking action, if it is transitory, then it is appropriate to overlook inflation. The situation with tariff inflation might be like that. I think it depends on whether we can quickly get through the tariff inflation."

Therefore, he stated that inflation caused by tariffs will be temporary remains the "baseline" forecast scenario. He pointed out that during Trump's first presidential term, "the last time there were tariffs," the impact on inflation was temporary.

Powell said that excluding tariffs, the basic inflation rate is about 2.5%. He "found no reason" to expect that the great inflation of the 1970s in the U.S. would repeat itselfComments suggest that Powell's use of the term "tariff inflation" seems intended to separate inflation caused by tariffs from other inflationary situations.

After Powell mentioned the impact of tariffs on inflation, the yield on the two-year U.S. Treasury bond, which is sensitive to interest rates, further widened its intraday decline, dropping below the psychological threshold of 4.0% at midday, plunging more than 10 basis points from an intraday high of nearly 4.09% before the Federal Reserve's decision statement was released.

Although the baseline forecast is that tariffs will not lead to a sustained acceleration of inflation, Powell stated, "We really don't know. We have to see how things actually develop."

Powell cautiously reiterated that "survey respondents" pointed out the impact of tariffs, while also mentioning that the recent inflation expectations survey by the New York Fed showed that long-term inflation expectations remain stable. He said that market indicators also reflect this. If we look at long-term inflation expectations derived from bond market indicators, there are no signs of a rebound in inflation. The five-year inflation expectation for the next five years shows that long-term inflation expectations have remained stable.

Partly Due to Tariffs, Progress in Inflation Decline This Year May Be Delayed

Powell commented, "Currently, we do see quite robust (economic) hard data," and employment growth is "at a healthy level."

Powell stated, "The relationship between survey data and actual economic data is not very tight. But we don't know if that's the case here. We will closely monitor for signs of weakness in the actual data."

Powell reiterated that the inflation-boosting effects of tariffs may lead to a later appearance of further progress in inflation cooling. He said:

"We believe that inflation has now begun to rise, partly due to the impact of tariffs, and progress in further (inflation decline) this year may be delayed."

When asked whether the policies of the Trump administration have had an impact on the data, Powell replied, "It is too early to predict a significant impact on economic data."

Still Optimistic About Employment Prospects, Unemployment Rate "Very Close to Its Natural Level"

When asked whether the Federal Reserve would lower its economic outlook for this year, Powell's response reflected the difficulty of predicting the impacts of tariffs and other policies, saying, "It's really hard to know how things will develop."

Despite the Federal Reserve's economic outlook released this Wednesday showing that officials significantly lowered their GDP growth expectations for the U.S. this year, Powell's remarks indicated that he remains optimistic about employment prospects.

He stated that the unemployment rate is "very close to its natural level." Currently, there is a "low layoff, low hiring" environment, which has remained "balanced" for about the past six months. However, the Federal Reserve is closely monitoring this situation, as a significant increase in layoffs combined with low hiring rates could "quickly" lead to unemployment.

External Predictors Raise the Likelihood of Economic Recession, But Still at "Relatively Mild Levels"

Powell acknowledged that the risk of economic recession may have increased in recent months, but he tried to reassure the public by pointing out that the likelihood of a recession is still low.

Powell said:

"The possibility of a recession always exists. Looking back, the likelihood of a recession has probably been around one in four at any given time. The question is whether the current situation has made those possibilities higher."

Powell pointed out that the Federal Reserve itself does not make predictions about economic recessions, although the Atlanta Fed has a "GDPNow" tool that recently predicted a slight contraction in the U.S. economy this quarter. He also noted that external forecasters have raised the likelihood of a recession in recent weeks.

Powell stated that forecasters have generally increased their expectations for the likelihood of a recession, but this possibility "remains at a relatively moderate level," adding, "Two months ago, people said the likelihood of a recession was extremely low. So it has changed, but not significantly."

He also said, "All forecasters have predicted tariff inflation. I don't know of any exceptions."

Weakness in soft data may be related to the turbulence during Trump's early presidency; Michigan University's inflation expectations data is an "outlier"

A recent series of economic surveys has raised concerns about the economic outlook. However, Powell believes that this "soft" data does not necessarily indicate economic weakness, "it may be related to the turbulence of the government's early presidency." He also pointed out that Americans' fundamental dissatisfaction with the economy may stem from price levels.

Powell stated that "hard" data shows low unemployment rates, healthy job growth levels, and consumer spending that is slowing but still robust, which indicates that the U.S. economy is "healthy."

Soft data often refers to surveys, which are typically seen as more subjective indicators of economic activity. In contrast, hard data, such as economic reports, is viewed as more definitive and objective indicators. He said:

"The relationship between survey data and economic activity is not very tight. Sometimes people say very pessimistic things about the economy, and then they go out and buy a new car."

Powell indicated that the consumer inflation expectations data from the University of Michigan is "an outlier," but the Federal Reserve has taken note of it.

When asked how the Federal Reserve would respond to stagflation, Powell stated that the Fed would study how far they are from their employment and inflation targets and understand how long it would take to reach each target. He said that stagflation is a very challenging situation, but we are not at that point yet.

When asked about the stock market pullback and how it might affect corporate confidence and spending by high-income households, Powell stated that it is important for the Fed to see significant and sustained changes in broader financial conditions.

Powell said he would not comment on any specific market. He reiterated that hard data remains solid. He acknowledged that "soft" survey data has deteriorated, which cannot be ignored. However, hard data remains robust for now.

Slowing the balance sheet reduction has not signaled anything; QT can continue for a longer time

This Wednesday, the Federal Reserve's decision statement announced that it will slow down the pace of reducing its balance sheet (quantitative tightening, QT) starting in April, significantly reducing its holdings of U.S. Treasuries, lowering the monthly redemption cap for U.S. Treasury bonds from $25 billion to $5 billion, an 80% reduction, while not adjusting the redemption caps for agency debt and agency mortgage-backed securities (MBS).

Powell stated that if QT is slowed down, the path of QT will become longer. The last time the Federal Reserve slowed QT, "people really liked doing that," and you can "slow down and last longer."

He also mentioned that the Federal Reserve has not released any signals by slowing down QT. Slowing down allows the Federal Reserve to approach its desired level of reserves "sufficiently" at a slower pace. There are no plans to slow down the reduction of MBS held by the Federal Reserve.

Powell acknowledged that the U.S. federal government debt ceiling has led to a decrease in the balance of the Treasury General Account (TGA), which is used for holding tax and other government revenue and expenditure funds, prompting the Federal Reserve to discuss slowing down QT. He stated that when discussing this QT decision, the Federal Reserve considered pausing QT and also considered slowing down QT, which indeed received strong support.

The removal of the balanced language regarding employment and inflation risks does not indicate greater concern about related risks

The Federal Reserve's decision statement removed the phrase indicating that the risks to employment and inflation targets are generally balanced. A reporter asked whether the removal of this phrase means that the Federal Reserve is more concerned about inflation or employment.

Powell responded that it is not as serious as it seems. "This does not represent any kind of (concern) situation. Sometimes, language plays its role, and then we just delete it. That's the situation. This really isn't meant to send any signals."

Powell indicated that when the Federal Reserve begins to shift from punitive rate hikes to rate cuts or maintaining stable rates, that phrase is useful language. "We have passed that stage, so we deleted it."