The U.S. economy may be facing a difficult situation as Powell admits the Federal Reserve is in a dilemma!

According to the Zhitong Finance APP, Federal Reserve Chairman Jerome Powell warned on Wednesday during a speech at the Chicago Economic Club that the U.S. economy may be facing a difficult situation, with rising inflation coexisting with slowing growth, which will create a clear conflict with the Fed's policy goals.

"We may find ourselves in a challenging situation where our dual mandate of promoting maximum employment and maintaining price stability may come into conflict," Powell stated in his speech. "If this occurs, we will weigh our policy options based on how far the economy is from each goal and the expected time needed to close those gaps."

This statement marks the first time in recent remarks that the Fed Chairman has explicitly pointed out that the U.S. economy has entered a phase that could leave policymakers in a "dilemma."

Uncertainty from Tariffs is a Key Variable

Powell noted that the recent shift in U.S. government trade policy, particularly President Trump's decision for a new round of tariffs, is exacerbating uncertainty in the macroeconomic outlook. "While we expect tariffs to push up inflation and drag down growth, we currently cannot determine which aspect should be prioritized."

Powell added that although tariffs theoretically resemble taxes on imported goods, which raise prices and suppress consumption, their direct transmission mechanism to inflation is not always clear. He emphasized that the Fed is closely monitoring whether short- to medium-term inflation expectations will rise, as this will have a critical impact on the Fed's policy path.

He indicated that the core Personal Consumption Expenditures (PCE) inflation rate for March is expected to be 2.6%, slightly above the Fed's long-term target of 2%. Additionally, some short-term inflation expectation indicators based on market and survey data have risen.

"Tariffs are very likely to push up inflation in the short term," Powell pointed out. "Whether these inflation effects persist will depend on the speed and breadth of price transmission, as well as the Fed's ability to stabilize the public's long-term inflation expectations."

"No Action" is the Best Strategy Currently

Despite high external attention on when the Fed will begin to cut interest rates, Powell did not provide clear guidance on the direction of future rates in this speech. He emphasized, "We are currently in a favorable position to wait for a clearer economic outlook before deciding whether to adjust our policy stance."

This "wait-and-see" policy stance is gaining increasing support within the Fed, especially against the backdrop of recent economic data showing "mixed signals." Powell mentioned that U.S. GDP growth slowed significantly in the first quarter; although auto sales were strong, overall consumer spending only achieved moderate growth. Meanwhile, due to concerns about future tariff increases, businesses have been importing goods in advance, which has increased the drag on GDP from net exports.

He stated, "The data we currently have indicates that economic growth in the first quarter has slowed significantly compared to last year."

Notably, on the day of Powell's speech, the U.S. Department of Commerce released data showing that March retail sales increased by 1.4% year-on-year, exceeding market expectations. A significant portion of this growth came from consumers rushing to purchase cars to avoid potential tariff impacts Federal Reserve Internal Echo: Financial Markets Have "Changed"

On the same day that Powell delivered his speech, Cleveland Fed President Loretta Mester expressed similar concerns at another forum.

"The current trends in the financial markets are different from the past 'risk-off' scenarios," Mester stated. "What we are observing is that while the stock market is declining, long-term U.S. Treasuries are also being sold off, and yields are rising, which is in stark contrast to the past situation where funds flowed into Treasuries during 'risk aversion' sentiment."

She pointed out that this pattern of a simultaneous decline in both stocks and bonds indicates a significant deterioration in investor confidence, and financial conditions have substantially tightened. Although the dollar has retreated somewhat, overall financing costs are rising, posing potential pressure on households and businesses.

Regarding the economic outlook, Mester noted that while "hard data" such as employment and growth are still performing reasonably well, "soft indicators" like consumer confidence and business expectations are continuously weakening, indicating that market concerns about the future are intensifying.

She specifically warned that the U.S. may face "stagflation," a combination risk of high inflation, weak growth, and employment. "Tariffs could trigger a chain reaction, and if other countries retaliate, it will create further upward pressure on inflation while economic activity is constrained."

At the policy-making level, Mester shares Powell's view, leaning towards maintaining interest rates at their current levels to observe data changes. She stated, "The current economic fundamentals do not support a rapid shift; we need to wait for more information to make informed decisions. In the context of both inflation and employment being under pressure, maintaining stability in monetary policy is a reasonable choice. My crystal ball can only see the present; we still need to wait and see what the future holds."

Market Expectations: Rate Cut Timing May Be Delayed, Pace Will Slow

The market currently widely expects the Federal Reserve to begin its rate-cutting cycle in June and to cut rates three to four times by the end of 2025, with each cut being 25 basis points. However, Powell and Mester's statements may prompt the market to reassess this expected path.

Analysts point out that unless inflation significantly cools and economic growth shows substantial slowdown in the coming months, the Federal Reserve may be more inclined to maintain a "wait-and-see" stance in the second half of 2024, and it may even face the dilemma of "raise or cut rates" once again