Trump’s tariffs are ‘highly likely’ to push prices up, Fed chief warns

President Donald Trump’s tariffs are “highly likely” to spur a temporary rise in inflation, Federal Reserve Board Chair Jerome Powell said Wednesday, cautioning that those effects could end up being longer-lasting.

In remarks before the Economic Club of Chicago, Powell said more persistent risks to inflation – and the Fed’s ability to avoid them – depend on how much tariffs end up affecting the economy and how long it takes trade policy to pass through to prices. Powell said many of the administration’s policies – on trade, immigration, fiscal matters and regulation – are still evolving. But higher inflation and slower growth are probably in store, he said.

“The level of the tariff increases announced so far is significantly larger than anticipated,” Powell said. “The same is likely to be true of the economic effects.”

Powell also said that as the Fed sets interest rates, it could end up in a place where its two mandates – stable prices and maximum employment – are “in tension.”

Typically, the Federal Reserve raises interest rates to combat inflation by making it more expensive to get all types of loans. The Federal Reserve lowers interest rates if it fears the economy is slowing too much and needs a boost. That could prove difficult if inflation is rising in the midst of a broader downturn.

Prices aren’t rising significantly so far, and there aren’t widespread signs of a broader downturn. Small-scale job losses, or the anticipation that prices could go up soon, would not be enough to push the Fed to act.

Yet Powell’s warning comes as the economy and the Fed enter yet another uncertain chapter. After spiking to 40-year highs, inflation has been slowly easing toward a more normal 2%. Officials had been optimistic they were inching closer to the coveted “soft landing,” in which inflation returns to normal, the job market stays strong, and the economy keeps growing. But that path risks being thwarted by Trump’s trade war and looming uncertainty for businesses and financial markets alike.

At the same time, the financial markets have been in turmoil. By midday Wednesday, the Nasdaq composite index was down more than 3% on the day, and the S&P 500 had dropped more than 2%, extending losses of 14% for the year for the Nasdaq and 9% for the S&P. Plus, investors are fleeing Treasurys and the dollar, assets usually considered safer when volatility hits markets.

Fed officials routinely say their outlook depends on how Trump’s policies unfurl. Part of the difficulty also stems from policies that change in a matter of days. Last week, the White House paused many of the steep import taxes on most countries for 90 days while further hoisting tariffs for China. It left in place a baseline 10% tariff on all imports from most countries and continued tariffs on imports of steel, aluminum and autos.

The shift prompted many forecasters to pare back their expectations for a recession. But that possibility is still on the table.

Earlier this week, Fed Governor Christopher Waller described new tariff policies as “one of the biggest shocks to affect the U.S. economy in many decades.” There’s plenty of uncertainty based on how large the tariffs are, for example. But Waller said it’s possible the effects on prices, while steep, won’t be permanent, so long as expectations around longer-term prices stay grounded. Still, aggressive tariff policy could slow growth to “a crawl” and push unemployment up, he said.

Fed officials ultimately will have to parse short-term shifts – such as a temporary rise in prices – from more lasting effects, such as inflation or a broader slowdown. The distinction matters because officials set interest rate policy with the long-term health of the economy in mind, rather than reacting to blips or individual pieces of data. And they have been wrong before: When inflation started rising on the heels of the pandemic, central bankers thought those increases would be temporary. By the time they rushed to raise interest rates, high prices were already pulsing through American life.

“I can hear the howls already that this must be a mistake given what happened in 2021 and 2022,” Waller said in his Monday speech. “But just because it didn’t work out once does not mean you should never think that way again.”

Under other scenarios, Fed leaders would also be hesitant to raise interest rates if the economy is slowing too much. That isn’t happening right now. The job market has stayed strong through upheaval in the federal government, and the unemployment rate is at a low 4.2%. The Fed’s preferred inflation gauge was at 2.5% in February.

But there are other concerning markers on the Fed’s dashboard, too. Retail sales jumped in March, with economists attributing the rise to consumers panic-buying before tariffs take hold. Industrial production fell in March, the first decline in four months. Stocks have also flashed red since Trump kicked off the trade war.

Trump has publicly pressured the Fed to lower interest rates to stimulate the economy. The Fed closely guards its independence from politics and takes pains not to get involved in fiscal policy. But Trump has historically ignored those norms, recently telling Powell to “stop playing politics!” in a post on social media.

“He is always ‘late,’ but he could now change his image, and quickly,” Trump wrote earlier this month.