– Uncertainty High Amid Trump Policy Changes, But Economy Still ‘In A Good Place’
– Fed Doesn’t Need To Be ‘In A Hurry’ to Lower Rates
By Steven K. Beckner
(MaceNews) – Federal Reserve Chair Jerome Powell said Friday the Fed has to wait for more “clarity” on the economic effects of the Trump administration’s trade and other policies before making any adjustments to monetary policy.
Because of “high uncertainty” about the outlook and because the economy is still “in a good place,” Powell repeated that the Fed’s policymaking Federal Open Market Committee does not need to be “in a hurry” to change its interest rate settings.
Although the Fed chief acknowledged that “downside risks” to the economy have increased, he seemed to strongly imply that the FOMC will not be cutting the key federal funds rate when it next meets in early May, as he spoke to the Society for Advancing Business Editing and Writing.
Lately, Powell and his colleagues have been stressing the heightened uncertainty about the outlook due to the Trump administration’s trade and other policies, and he continued in that vein Friday, even though, as he noted, there is actually more certainty about the specifics of Trump’s tariffs in wake of the Wednesday “liberation day” announcement.
At its March 19 meeting, the FOMC voted to leave the federal funds rate unchanged in a target range of 4.25% to 4.5% while tilting toward further rate cuts. The 19 participants projected the policy rate will end 2025 at 3.9% (a range of 3.75% to 4.00%) in the quarterly Summary of Economic Projections – the same as in the December SEP.
At the same time, the FOMC voted to slow the pace of shrinkage in its portfolio of Treasury securities or “quantitative tightening.” Though Powell said the change had no monetary policy significance, some saw it as a form of monetary easing.
The FOMC will meet again on May 6-7, but there won’t be a new SEP funds rate “dot plot” until the June 17-18 meeting.
Since its March meeting, the FOMC has gotten disappointing data news, as its preferred inflation gauge, the core price index for personal consumption expenditures (PCE) was reported up a worse than expected 0.4% in February or 2.8% from a year earlier. The overall PCE rose 2.5%. President Trump’s aggressive tariff policies have amplified inflation concerns and lifted inflation expectations, while also causing financial market turmoil.
On the employment side of the Fed’s dual mandate, the Labor Department reported Friday morning that non-farm payrolls rose a surprising 228,000 in March, following a downwardly revised 117,000 in February. But the unemployment rate rose a tenth to 4.2%. Average hourly earnings gains slowed from 4.0% to 3.8%. Earlier this week, the agency reported that job openings have fallen to their lowest level in four years.
A decline in consumer confidence and cooling consumption have led to expectations of slower economic growth and a softer job market. In its latest GDPNow forecast, the Atlanta Federal Reserve Bank estimated real GDP contracted by 2.8% in the first quarter, following positive growth of 2.4% in the fourth quarter. And, in an early March reading, the Institute for Supply Management’s manufacturing index dipped back below 50 for the first time since December, as the production, employment, and new orders components all weakened.
Overhanging the economy and financial markets, meanwhile, has been the added uncertainty injected by the Trump administration’s trade policies.
Despite all these economic and financial clouds, Powell avoided talking about a potential recession. Indeed, at the SABEW event, he continued to emphasize the relative strength of the economy and labor markets.
“While uncertainty is high and downside risks have risen, the economy is still in a good place,” he said in prepared remarks. “The incoming data show solid growth, a labor market in balance, and inflation running much closer to, but still above, our 2% objective.”
Referring to Friday morning’s employment report, Powell said it showed the unemployment rate is “still in the low range where it has held since early last year.” And he observed that “over the first quarter, payrolls grew by an average of 150,000 jobs a month.”
“The combination of low layoffs, moderating job growth, and slowing labor force growth has kept the unemployment rate broadly stable,” he added.
If anything, Powell seemed more worried about inflation, noting that “progress toward our 2% inflation objective has slowed.” He added that “higher tariffs will be working their way through our economy and are likely to raise inflation in coming quarters.”
Because of tariff anxieties, Powell said “both survey- and market-based measures of near-term inflation expectations have moved up,” but he continued to insist that longer-term inflation expectations “remain well anchored and consistent with our 2% inflation goal.”
While remaining upbeat about the economy, Powell was anything but complacent at the end of a turbulent week in financial markets.
Speaking two days after President Trump’s launch of worldwide reciprocal tariffs triggered a major stock selloff and a U.S. dollar plunge, Powell said, “we face a highly uncertain outlook with elevated risks of both higher unemployment and higher inflation.”
Pointing to the administration’s roll-out of higher reciprocal tariffs, as well as planned changes in tax, regulatory and immigration policy, Powell said “our monetary policy stance is well positioned to deal with the risks and uncertainties we face as we gain a better understanding of the policy changes and their likely effects on the economy….”
But he said, “it will be very difficult to assess the likely economic effects of higher tariffs until there is greater certainty about the details ….”
“While uncertainty remains elevated, it is now becoming clear that the tariff increases will be significantly larger than expected,” Powell continued. “The same is likely to be true of the economic effects, which will include higher inflation and slower growth.”
“The size and duration of these effects remain uncertain,” he went on. “While tariffs are highly likely to generate at least a temporary rise in inflation, it is also possible that the effects could be more persistent.”
Powell said the Fed’s “obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem.”
But for the time being, the FOMC will have to “wait for greater clarity before considering any adjustments to our policy stance,” he said. “It is too soon to say what will be the appropriate path for monetary policy.”
The theme of waiting for clarity was one Powell returned to again and again as he responded to business reporters probing for when the FOMC might change its rate settings.
Because of uncertainty about the ultimate effects of tariff and other non-monetary policies, Powell said “this is a good time to take step back and let things clarify…That’s why it’s just too soon to say what the appropriate response should be….”
“We’ve taken a step back,” he continued. “We’re watching to see what (Trump) policies turn out to be and how they affect the economy …. Policy is in a good place to do that.”
Powell again described monetary policy as “moderately restrictive, which is appropriate since inflation is well above target.”
The funds rate target range of 4.25% to 4.5% is “appropriate,” while “we’re waiting for greater clarity before we consider adjustments,” he added. “We’re waiting fore clarity about what our policy should be.”
As he has been saying all year, Powell said, “It feels like we don’t need to be in a hurry….”
“Inflation is going to be moving up; growth is going to be slowing, but it’s not clear now what the appropriate path for monetary policy is going to be,” he elaborated, repeating, “We have to wait before we make those adjustments…”
In the current economic and financial climate, “there’s a lot of waiting and seeing, including by us….,” he remarked.
If the Fed’s two mandates of price stability and maximum employment diverge, and inflation rises along with unemployment, Powell said the FOMC would adopt a predetermined strategy: “We would think about how far each variable is from its goal; how long it will take each to get back and compare … Then you look at that and say what do we need to do..If one is further away you focus on that….”
But he added, “we’re not actually facing that today.”
Powell’s fellow policymakers seem to be largely in agreement with his approach, judging from comments made this week.
On Tuesday, New York Federal Reserve president John Williams said he expects the central bank to keep rates unchanged for “some time” as the Fed assesses how tariffs affect the economy.
“There’s a lot of uncertainty about how the economy will evolve and a lot of uncertainty about all the policy actions,” the FOMC Vice Chairman said. “We’ll see about that, but also how the US economy, and importantly, the global economy, respond to these developments.”
On Wednesday, Fed Governor Adriana Kugler said she “will support maintaining the current policy rate for as long as these upside risks to inflation continue, while economic activity and employment remain stable.”
On Thursday, Fed Vice Chairman Phillip Jefferson lamented that inflation has stopped moderating and is now “moving sideways,’ and noted “the prospect of tariffs has consumers and businesses reporting that they expect higher inflation…”
Echoing the “higher degree of uncertainty” surrounding trade policy, Jefferson said, “there is no need to be in a hurry to make further policy rate adjustments. The current policy stance is well positioned to deal with the risks and uncertainties that we face in pursuing both sides of our dual mandate.”
Also speaking Thursday, Fed Governor Lisa Cook took a similar view, although she expressed greater concern about longer term inflation expectations.
“Amid growing uncertainty and risks to both sides of our dual mandate, I believe it will be appropriate to maintain the policy rate at its current level while continuing to vigilantly monitor developments that could change the outlook,” she said.
“Over time, if uncertainty clears and we see further progress on inflation toward our 2% target, it will likely be appropriate to lower the policy rate to reduce the degree of monetary policy restriction,” Cook said, although she said she “could imagine scenarios where rates could be held at current levels longer or eased faster based on the evolution of inflation and unemployment.”
“For now, we can afford to be patient but attentive,” she added.