Powell's full text: Tariffs are higher than expected, and the impact will be greater than expected

Author: Jinshi Data

In his latest speech on Friday, Fed Chairman Powell reiterated the Fed's commitment to maximizing employment and stable inflation (2% target), pointing out that the current economy is stable but faces uncertainties such as trade policy, the labor market is balanced, inflation slows down but there is still pressure, monetary policy will remain prudent and adjust flexibly based on data to avoid short-term shocks from evolving into sustained inflation. He mentioned uncertainty many times, saying that he needed to continue to wait and see and wait for more clarity. Regarding tariffs, he said that the tariff increase will be greater than expected and the economic impact may also be more significant than expected.

Powell's speech

Thank you for inviting me today. Monetary policy is more effective when the public understands what we are doing and why. Through your work, journalists like you have helped promote deeper understanding. I believe that all the reporters here must have many questions to ask. Before answering some questions, I will briefly outline the prospects of economic and monetary policy.

At the Fed, we focus on achieving the dual mission goal that Congress has given us: maximizing employment and stabilizing prices. Despite high uncertainty and rising downside risks, the economy is still in good shape. The latest data show that economic growth is solid, the labor market is balanced, and inflation is close to but still above our 2% target.

Recent economic data

After several years of solid growth, many forecasters expect growth to slow down this year. Preliminary data on first-quarter GDP will be released later this month. Limited hard data is consistent with the slower but still solid growth prospects. Meanwhile, survey reports from households and businesses show that expectations have declined and uncertainty about the outlook has increased. Survey participants noted that new federal policies, especially those related to trade, are having an impact. We are closely watching the contradiction between these hard data and soft data. As the new policies and their possible economic impacts become clearer, we will have a clearer understanding of the impact of these policies on economic and monetary policies.

From multiple indicators, the labor market appears to be in roughly equilibrium and has not become a significant source of inflationary pressure. The employment report this morning showed that the unemployment rate in March was 4.2%, still at a low level since the beginning of last year. In the first quarter, non-farm employment increased by an average of 150,000 jobs. Low layoffs, moderate employment growth and slowing labor participation rates jointly drive unemployment to remain stable.

Another aspect of turning to a dual mission, inflation has dropped sharply from the peak of the epidemic in 2022. This decline is achieved without experiencing the pain of high unemployment rates that are usually accompanied by tightening monetary policy. Inflation has made progress towards the 2% target in recent times, but this progress has slowed down. In February this year, the price of personal consumption expenditure (PCE) rose by 2.5% year-on-year. Excluding the two volatile categories, food and energy, the core PCE price rose by 2.8%. Looking ahead, higher tariffs will gradually affect our economy and may drive inflation higher in the coming quarters. Both market expectations and survey data show that inflation expectations have risen in the short term. By most measures, long-term inflation expectations (i.e., expectations in the next few years) remain stable and consistent with our 2% inflation target. We remain committed to sustainably returning inflation to the 2% target.

Monetary Policy

When it comes to monetary policy, we face a highly uncertain prospect with higher risks of unemployment and higher inflation. The new government is implementing major policy changes in four different areas: trade, immigration, fiscal policy and regulation. Our monetary policy stance is ready to address these risks and uncertainties and will be adjusted after we have a clearer understanding of policy changes and the impact it may have on the economy. Commenting on these policies is not our responsibility. Instead, we evaluate their possible impacts, observe economic behavior, and adjust monetary policy on this basis to best achieve our dual mission goals.

We have made it clear that it is very difficult to assess the possible impact of tariff hikes on the economy until there is more information on the details of tariffs, such as tariff objects, rates and duration, and retaliation measures by trading partners. At present, although uncertainty remains high, it is obviously foreseeable that tariff increases will be greater than expected. The economic impact may also be more significant than expected, including higher inflation and slower growth.

The scale and duration of these effects are unclear. While tariffs are most likely to lead to at least temporary inflation increases, they can also lead to more lasting effects . The key to avoiding such results is to maintain the stability of long-term inflation expectations, the scale of the impact, and the time when these effects are passed to prices. Our responsibility is to ensure long-term inflation expectations remain stable and to ensure that one-time price increases do not turn into persistent inflation problems.

We will continue to carefully monitor upcoming data, changes in economic outlook and balance of risks. Our policy stance will not be easily adjusted until we have a clearer understanding of the future prospects of the economy. It is too early to conclude that the appropriate path to monetary policy is.

Conclusion

We understand the benefits of a robust economy – allowing workers to find jobs, inflation remains low and predictable. We also understand that excessive unemployment or inflation can cause harm and pain to communities, families and businesses. That's why we at the Federal Reserve continue to do our best to achieve the goal of maximum employment and price stability.

Thank you everyone. I look forward to your questions.