Powell shows hawkish stance again: Inflation remains high, employment stability is difficult, reiterates the Federal Reserve's wait-and-see position

According to the Zhitong Finance APP, Federal Reserve Chairman Jerome Powell reiterated that the central bank must ensure that tariffs do not trigger a more persistent rise in inflation.

Powell stated on Wednesday at the Chicago Economic Club, "Our responsibility is to anchor long-term inflation expectations and ensure that a one-time increase in price levels does not evolve into a persistent inflation problem."

Powell noted that policymakers will balance the dual responsibilities of promoting full employment and stabilizing prices, stating, "Remember, without price stability, we cannot achieve strong labor market conditions that benefit all Americans in the long term."

Michael Feroli, Chief U.S. Economist at JPMorgan Chase, indicated in a report to clients that this statement positions price stability as a "prerequisite" for sustainably achieving the Fed's employment mission.

Feroli stated, "By continuously focusing on the inflation aspect of the Fed's mission, Powell has once again resisted market pricing expectations for a rapid monetary policy response to signs of deteriorating growth prospects."

These remarks reinforce Powell's repeatedly emphasized viewpoint, including the recent message highlighted on April 4: Fed officials are not in a hurry to change the central bank's benchmark policy interest rate.

Derek Tang, an economist at Washington LH Meyer/Monetary Policy Analytics, pointed out Powell's comments that the Fed must "ensure" that tariff-driven price increases do not fuel long-term inflation.

Tang remarked, "'Ensure' is a very, very interesting word. Because certainty is a very high standard."

Chris G. Collins, an economist at Bloomberg Economics, stated, "These remarks suggest 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 to better understand how Trump's economic policies—especially trade policies—will impact the U.S. economy, Powell and other Fed policymakers expressed support for maintaining stable interest rates.

Maintain Stability

Powell stated, "At present, we are in a favorable position to wait for clearer information before considering adjustments to our policy stance."

During the Q&A session following his speech, Powell indicated that he expects both the unemployment rate and inflation rate to deviate from the Fed's targets "possibly for the remainder of this year."

The Fed Chairman acknowledged that a weakening economy and rising inflation could ultimately create a conflict between the central bank's two goals.

He stated, "We may find ourselves in a challenging situation where the dual mandate goals are in conflict. If that occurs, we will consider the gaps between the economy and each goal, as well as the different time spans that may be needed to close those gaps."

Powell also commented on the recent turmoil in financial markets, emphasizing that the market's performance "is largely in line with expectations." Powell stated, "The market is facing a lot of uncertainties, which means volatility, but even so, the market is still functioning normally." He added, "The market is doing what it should be doing; it is orderly."

Trump continues to significantly alter his plans for imposing new tariffs, causing anxiety among businesses, consumers, and global financial markets.

After the so-called reciprocal tariff plan announced on April 2 caused market turmoil, he postponed the plan. He pushed for a 10% base tariff globally and over 100% tariffs on China, while sending mixed signals regarding exemptions for smartphones and other tech products. He also imposed tariffs on imports of cars, steel, and aluminum, and hinted that the pharmaceutical and semiconductor industries might be the next targets.

Many analysts estimate that tariffs will drive up inflation and slow economic growth, a view Powell agrees with. According to the Fed's preferred measure, as of February, the inflation rate over the past year was 2.5%, significantly down from the peak after the COVID-19 pandemic, but still stubbornly above the Fed's 2% target. Powell indicated in his speech that this measure is expected to drop to 2.3% in March.

Inflation Expectations

Powell reiterated on Wednesday that the announced tariff increases so far are significantly larger than expected. He added that tariffs are very likely to lead to at least a temporary rise in inflation, but the inflation impact could also be more lasting.

He stated, "Avoiding this outcome will depend on the magnitude of the impact, the time required for these effects to fully pass through to prices, and ultimately, it will depend on solid long-term inflation expectations."

By the end of 2024, Fed officials are expected to cut rates three times in a row, but in 2025, they will begin to adopt a more patient stance in the face of sticky inflation. Many officials further reinforced this idea, emphasizing the need to minimize the risks of tariffs causing sustained inflation increases and rising long-term expectations among Americans regarding price growth.

Meanwhile, layoffs and the unemployment rate stood at 4.2% in March, still at a low level. U.S. employers added 228,000 jobs last month, exceeding expectations.

Powell stated that the central bank is far from stopping the reduction of its balance sheet and added that reserves remain ample. He noted that a slower pace of balance sheet reduction means the Fed can continue to shrink its portfolio for a longer period