Washington (CNN) — President Donald Trump’s significant policy changes, including on tariffs, are unlike anything seen in modern history, putting the Federal Reserve in uncharted waters, Chair Jerome Powell said Wednesday.
“These are very fundamental policy changes,” Powell said at an event hosted by the Economic Club of Chicago. “There isn’t a modern experience for how to think about this.”
Powell said “the level of the tariff increases announced so far is significantly larger than anticipated” and that the lingering uncertainty around tariffs could inflict lasting economic damage. With Trump’s tariffs putting the economy on a path toward weaker growth, higher unemployment and faster inflation — all at the same time — the Fed is also facing a situation it hasn’t dealt with in about half a century.
“We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension,” Powell said.
US stocks tumbled as Powell spoke: The Dow was down 700 points, or 1.7%. The broader S&P 500 fell 2.5%. The tech-heavy Nasdaq Composite slid 3.5%.
The Fed is responsible for promoting full employment and keeping inflation in check, but Trump’s tariffs threaten both of those goals. For now, however, the US economy remains in decent shape, according to the latest data.
Powell said the Fed’s best move for the moment is to stand pat until the data clearly shows how the US economy is responding to Trump’s policies.
But it’s only a matter of time until Trump’s tariffs stoke inflation, push up unemployment and weaken economic growth, according to most economists, especially if the massive “reciprocal” tariffs that went into effect briefly on April 9 are put back in place. Trump delayed that historic hike in import taxes until July.
So far, Trump has imposed 25% tariffs on aluminum and steel; 25% tariffs on goods from Mexico and Canada that aren’t compliant with a free-trade agreement; a massive 145% duty on Chinese imports; a 25% tariff on cars, with separate tariffs on auto parts coming at a later date; and a 10% baseline tariffs on all US imports.
The administration also introduced temporary exemptions for some electronic goods, and Trump has said separate tariffs are likely coming down the pike on semiconductors, pharmaceuticals, copper and timber.
“Jerome Powell just laid down the law with Trump,” David Russell, global head of market strategy at TradeStation, said in commentary issued Wednesday. “It was a clear warning about stagflation, and a declaration that the Fed won’t enable the White House with rate cuts.”
Does the Fed have a good playbook?
The Fed might be confronted with a challenge it hasn’t dealt with in decades.
In the 1970s and early 1980s, the US economy suffered periods of high unemployment and double-digit inflation, a troublesome combination known as “stagflation.” Back then, under the leadership of Fed Chair Paul Volcker, the Fed prioritized fighting inflation, even if it meant inflicting some economic pain.
The US economy seems to heading in that direction, according to most forecasts, but it’s unclear whether or not it will fully reach that point. Chicago Fed President Austan Goolsbee said last week at an event in New York that Trump’s tariffs are putting the central bank in that same tough spot.
“A tariff is like a negative supply shock. That’s a stagflationary shock, which is to say it makes both sides of the Fed’s dual mandate worse at the same time,” he said. “Prices are going up while jobs are being lost and growth is coming down, and there is not a generic playbook for how the central bank should respond to a stagflationary shock.”
Powell said if stagflation does become a reality, “we would consider how far the economy is from each goal, and the potentially different time horizons over which those respective gaps would be anticipated to close.”
“We understand that elevated levels of unemployment or inflation can be damaging and painful for communities, families, and businesses,” he said.
Several Fed officials have said that the central bank should keep a close eye on people’s perception of prices, which have deteriorated based on the University of Michigan’s closely watched consumer survey. It’s unclear at what point rising inflation expectations would prompt any action from the Fed and what those moves would be.
And inflation, albeit substantially below a four-decade peak reached in June 2022, is still slightly above the Fed’s 2% target, meaning the Fed has less of a reason to resume cutting interest rates.
But for now, most officials seem to agree that it’s best to wait for any evidence to show up in the data.
“This is a difficult set of risks for monetary policy to navigate,” Cleveland Fed President Beth Hammack said Wednesday at an event in Columbus, Ohio. “Given the economy’s starting point, and with both sides of our mandate expected to be under pressure, there is a strong case to hold monetary policy steady in order to balance the risks coming from further elevated inflation and a slowing labor market.”
“When clarity is hard to come by, waiting for additional data will help inform the path ahead,” she added.
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