By Nicole Goodkind
Federal Reserve officials backed Chair Jerome Powell's "wait-and-see" message on Friday, signaling they won't rush to respond to the inflationary impact of President Donald Trump's so-called "Liberation Day" tariffs, even as price pressures mount.
The Fed held interest rates steady on Wednesday with a benchmark rate of 4.25%-4.50%. In the press conference following the policy announcement, Powell used some iteration of the word "wait" more than 20 times.
But when will the Fed stop waiting and start seeing? It might be a while.
Speaking Friday at the Hoover Monetary Policy Conference at Stanford University, policymakers echoed Powell's call for patience, saying the central bank needs more clarity on how the tariffs will ripple through the economy before adjusting interest rates.
Officials described a foggy outlook, clouded by policy uncertainty. The Fed, they said, is in a holding pattern, but they're bracing for signs of fallout.
While it's broadly accepted that tariffs will push prices higher, the depth and duration of that inflation remains uncertain. A temporary spike would be manageable, but the real danger lies in second-round effects where price hikes reshape inflation expectations and make them more difficult to unwind. That would lead to slower growth and entrenched inflation, also known as stagflation.
Tariffs coming after an extended postpandemic period of elevated inflation could be enough to provoke an outsized reaction, said Federal Reserve Bank of Cleveland President Beth Hammack. Consumers and businesses, she said, may "respond differently to this event than might otherwise have been the case."
St. Louis Federal Reserve President Alberto Musalem outlined two possible paths forward. "It is possible that higher inflation will be short lived and mostly concentrated in the second half of 2025," as companies burn through inventory and pass on higher costs with one-off price hikes, he said, "[but] it is equally likely that inflation could prove to be more persistent."
The uncertainty leaves policymakers with little choice but to tread carefully, especially as they try to balance their dual mandate of full employment and stable inflation. The threat of stagflation complicates that task. Raise rates, and risk choking growth and jobs. Lower them, and risk an inflation spiral.
Until now, most officials had avoided declaring which side of the mandate they would favor. On Friday, Musalem was more explicit. "Because price stability is necessary for maximum employment," he said, "I believe policy must prioritize inflation if expectations threaten to become unanchored."
Hard data hasn't yet shown a serious impact from the tariffs, but officials say that sentiment is flashing red. Fed Gov. Lisa Cook said that trade disruptions could soon weigh on productivity.
She said that she expects "a drag on productivity in the near term stemming from the recent changes to trade policy and the related uncertainty." Investment is already being scaled back, she said, as firms shelve big spending plans and absorb the rising costs of imported materials.
That slowdown, Cook warned, may have lasting consequences. Protectionist trade policies could "inadvertently lead to a less competitive environment, if they prop up less efficient firms," she said.
And that could tie the Fed's hands even further. Reduced productivity means lower potential growth and more inflationary pressure. If those dynamics show up in the data, Cook said, it "could cause me to support keeping rates at a higher level for longer."
Write to Nicole Goodkind at nicole.goodkind@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
May 10, 2025 11:41 ET (15:41 GMT)
Copyright (c) 2025 Dow Jones & Company, Inc.
Comments