Fed’s Powell warns tariffs may upset inflation-growth balance
US Federal Reserve (Fed) Chair Jerome Powell acknowledged on Wednesday that the central bank is facing a growing dilemma in fulfilling its dual mandate of price stability and maximum employment. Speaking against the backdrop of an intensifying global trade war, Powell warned that escalating tariffs could fuel inflation while undermining growth, complicating the path for interest rate decisions.
“We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension,” Powell said in prepared remarks delivered at the Economic Club of Chicago. “If that were to occur, we would consider how far the economy is from each goal, and the potentially different time horizons over which those respective gaps would be anticipated to close.”
With higher import levies and worsening global trade relations, inflation is expected to rise even as economic growth and labour market strength come under pressure. Lower interest rates would support economic activity but may also fuel inflation, while raising rates could further dampen already slowing growth.
Powell, however, reaffirmed that price stability remains the Fed’s top priority: “Our 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,” he stated. “Without price stability, we cannot achieve the long periods of strong labour market conditions that benefit all Americans.”
While he gave no clear signal regarding the timing of any policy change, Powell said: “For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance.”
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Wall Street slumps as gold hits new highPowell’s comments reduced the likelihood of a Fed rate cut in June, compounding a selloff in US equity markets already pressured by Nvidia’s plunge on Wednesday. The tech-heavy Nasdaq Composite dropped 3.07%, the S&P 500 fell 2.24%, and the Dow Jones Industrial Average shed 1.73%.
The US dollar weakened further, with the Dollar Index closing below 99 for the first time since March 2022. The euro surged past 1.14 in late trading before the EUR/USD pair eased slightly to 1.1369 by 5:23 am CEST.
Sentiment stabilised somewhat during Thursday’s Asian session, with US stock futures recovering and the dollar rebounding modestly.
Meanwhile, gold prices surged to fresh record highs, as investors sought safe havens. Gold futures on Comex jumped 3.3% to $3,351 per ounce, while spot gold rose 3.5% to $3,339 per ounce at 4:46 am CEST.
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ECB decision in FocusPowell’s remarks came just hours ahead of the European Central Bank’s (ECB) monetary policy decision, due later today. The ECB is widely expected to cut interest rates for the third consecutive time this year. With eurozone inflation continuing to ease, the central bank is likely to adopt a more accommodative stance to support growth amid rising global trade uncertainty, particularly linked to US tariff threats.
Annual inflation in the eurozone slowed to 2.2% in March, the lowest level in four months. Compared with the Fed, the ECB faces fewer constraints in adjusting policy, partly thanks to a surging euro, which has helped contain imported inflation. The EUR/USD pair has gained more than 9% since late February, supported by safe-haven flows.
However, a dovish tone from the ECB could put renewed pressure on the euro, potentially limiting its recent gains against the dollar.
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