Powell Warns of ‘Challenging Scenario’ for Fed as Trade War Rages
Sees strong likelihood that consumers face higher prices while unemployment rises because of tariff increases
By Nick Timiraos, The Wall Street Journal, Updated April 16, 2025
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Powell said he saw a “strong likelihood” that consumers would face higher prices and that the economy would see higher unemployment as a result of tariffs in the short run.
This would create a “challenging scenario” for the central bank because anything it does with interest rates to address inflationary pressures could worsen unemployment, and vice versa…
Powell pointed to carmakers and their assembly chains as one example of economic activity that could be “disrupted significantly” by tariffs.
You would worry that that process will take some years and that the inflationary process might be extended,” Powell said. “When you think about supply disruptions, that is the kind of thing that can take time to resolve and it can lead what would’ve been a one-time inflation shock to be extended, perhaps more persistent.”
The upshot is that the Fed is likely to hold back from lowering interest rates, which can stimulate demand by spurring purchases of interest-rate sensitive goods, until it sees an increase in joblessness. … [end quote]
This is quite a change from the Fed’s mistaken judgment that inflation would be “transitory” in 2022. Powell doesn’t want to go down in the history books as the Fed chair who made the same mistake twice.
As a bond investor, the declaration that inflation would be higher than expected and last longer pushes in the direction of TIPS, which yield more than Treasuries if inflation is higher than expected. The yield of TIPS in the secondary market is lower than it was last week.
Higher interest rates are bad for business and for the stock market.
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Wendy