Jerome Powell Warns About Rising Inflation Rates, Slowing Job Growth Amid US-China Tariff War

Amidst the ongoing tariff war between US and China, Federal Reserve Chair Jerome Powell delivered a significant speech addressing the growing uncertainty in the US economy and rising concerns over the trade policy.

Speaking at the Economic Club of Chicago, Powell emphasized that the Federal Reserve would take a cautious approach, waiting for more economic data before making any changes to interest rates. He noted that inflation, already a key concern, is expected to face additional pressure due to President Donald Trump's on-again off-again tariff strategies.

"Our obligation is to keep longer-term inflation expectations well anchored to make certain that a one time increase in the price level does not become an ongoing inflation problem," the investment banker said.
He reiterated that the Fed's dual mandate is to maintain price stability and maximize employment. While job growth had been strong in previous quarters, Powell pointed out that employment gains had slowed to an average of 150,000 jobs per month during the first quarter of the year. Meanwhile, inflation continues to run above the Fed's 2 per cent target, raising concerns about the sustainability of economic momentum.

"Unemployment is likely to go up as the economy slows, in all likelihood, and inflation is likely to go up as tariffs find their way and some part of those tariffs come to be paid by the public," Powell estimated. "So that's the strong likelihood."

During a question-and-answer session after the speech, Powell acknowledged that there is a "strong likelihood" that the economy may diverge from the Fed's two primary goals-maximum employment and stable prices-for the remainder of the year. He attributed this potential deviation largely to the prolonged impact of tariffs on consumer and business sentiment.

Powell further stated that if the trade war continues to escalate, inflation could rise substantially, potentially pushing the Fed's preferred inflation gauge-the Personal Consumption Expenditures (PCE) price index-from its current range of 2.7 per cent to as high as 4 per cent or even 5 per cent. As of March, the total PCE index had risen by 2.3 per cent over the previous year, while the core PCE-which excludes volatile food and energy prices-had increased by 2.6 per cent.

Commenting on the broader economic performance, Powell highlighted that the initial reading of the first quarter GDP indicates a slowdown compared to last year's robust growth. He expressed cautious optimism that motor vehicle sales might contribute positively to the economy, while expecting consumer spending to remain modest. He also stressed that the effect of tariffs on imports would have a significant influence on GDP figures moving forward.

"Surveys of households and businesses report a sharp decline in sentiment and elevated uncertainty about the outlook, largely reflecting trade policy concerns," Powell observed.

Powell also discussed about the recent volatility in the financial markets caused by Trump's "Liberation Day" tariff announcement. When asked about whether the Fed would intervene if the markets took a steep dive, Powell firmly responded "No". He explained his stance stating that, "Markets are struggling with a lot of uncertainty and that means volatility. But having said that, markets are functioning...They're orderly and they're functioning just about as you would expect them to function."

Powell's remarks underscore the Fed's cautious stance amid a climate of growing geopolitical tensions, fluctuating trade dynamics, and persistent uncertainty surrounding US economic policy.