Often likened to a skilled mariner navigating the turbulent tides of the economy, Jerome Powell, the chair of the Federal Reserve, has been making waves with his strategic approach to managing the potential inflationary impacts of President Donald Trump’s tariffs. While President Trump has bestowed upon him the nickname “Mr. Too Late,” Powell asserts that arriving late is preferable to being wrong.
The Soft Landing Strategy
Just a few months ago, Powell was advocating for a soft landing, an economic scenario that would ideally see inflation and interest rates decrease while unemployment rates remain low. However, the introduction of Trump’s tariffs has altered the economic forecast, leading to predictions of weaker economic growth and increased inflation this year.
In response to these changes, Federal Reserve officials have restructured their strategy, aiming to save the economy in the nick of time. They plan to maintain steady interest rates to contain inflation, but they are also prepared to lower them just in time to prevent the labor market from collapsing. According to Aditya Bhave, senior U.S. economist at BofA Securities, “They prefer to be late than wrong. They’re going to wait and see how things play out on both mandates.”
The Risks of Waiting
- Powell and his colleagues have warned that the inflationary impact of Trump’s tariffs could be more persistent than anticipated. They have highlighted the Federal Reserve’s responsibility to ensure that any surge in prices is limited. This means maintaining a strict stance on interest rates to control price expectations and holding interest rates steady unless there is a significant increase in unemployment.
- Waiting, however, is not without risk. Once the unemployment rate starts to rise, it typically does so rapidly, potentially tipping the economy into recession.
- The upside is that holding off on lowering interest rates could prevent the build-up of price pressures, something officials are keen to avoid in the wake of the post-pandemic inflation surge.
Powell’s Personal Mission
For Powell, ensuring a soft landing after the post-pandemic inflation peak has become a personal mission. In December 2023, Powell called for the end of the Fed’s rate-hiking cycle. At that time, inflation was less than a percentage point above the Fed’s 2% goal, down from a high of 7.2% in 2022.
When it was time to lower rates in September, Powell convinced his colleagues on the Federal Open Market Committee to implement an aggressive half-point cut to keep the labor market robust. They ended up cutting rates by a percentage point over three meetings before holding this year as inflation seemed to stabilize above their target.
Trump’s Tariff Plans and Their Impact
By the time Trump had reclaimed the White House, it was clear that the threat of tariffs would keep prices high. This led officials to anticipate higher inflation and slower growth. Trump’s tariff plans could not have arrived at a more sensitive time. The previous five readings on core inflation were unexpectedly high. In February, the Fed’s preferred measure of underlying inflation was at 2.8%. Economists predict it eased to 2.6% in March — still considerably above the central bank’s target.
According to Lindsey Piegza, chief economist at Stifel Financial Corp, “They did not reinstate price stability, and may have eased too aggressively. I am concerned about inflation stability with or without the tariffs. We are at risk.”
These concerns are shared beyond the Federal Reserve. Consumer inflation expectations surged in April, and economists surveyed by Bloomberg this month argue that the trade war makes the odds of a U.S. recession a coin flip.
Final Thoughts
Should a recession occur, the Federal Reserve could face even greater hostility from the White House. However, a central bank that fails to control inflation after being above target for four years could truly lose credibility. As Diane Swonk, chief economist at KPMG, put it, “The biggest mistake the Fed could make would be to instill additional inflation as the economy weakens.”
This story was originally featured on Fortune.com.
