‘We know tariffs are coming in, and all forecasters have tariff inflation affecting core CPI inflation’ – Fed Chair Powell

WASHINGTON (March 19) Following the Federal Reserve’s decision to keep interest rates unchanged as expected, FOMC Chair Jerome Powell’s press conference focused on the Trump administration’s tariffs: How much they were baked into the latest Fed projections, what impact they’d already had, and how likely they were to raise inflation, lower growth, hurt employment, and impact interest rates – or even send the U.S. economy into recession.

The first question directly addressed the degree to which Trump’s trade tariffs had already changed the economic environment. Powell set the tone for the conversation early, insisting that the situation was above all uncertain.

“It is going to be very difficult to have a precise assessment of how much of inflation is coming from tariffs,” he said. “You may have seen that goods inflation moved up pretty significantly in the first two months of the year. Trying to track that back to actual tariff increases, what was tariff and what was not, very, very challenging.”

“The answer is clearly some of it – a good part of it –  is coming from tariffs,” he conceded. “But we will be working, and so will other forecasters, to try to find the best possible way to separate nontariff inflation from tariff inflation.”

Pressed on why the Fed’s latest longer-term inflation expectations and rate path appeared unchanged despite the looming tariffs, Powell agreed that at this stage, the central bank was treating their impact as likely transitory rather than long-running.

“I think that's the base case, but as I said, we really can't know that,” the Fed chair said. “We are going to have to see how things actually work out. And the fact that there wasn't much change, I think that's partly because you see weaker growth but higher inflation, [so] they kind of offset. Also, frankly, a little inertia when it comes to changing something in this highly uncertain environment.”

Asked to what degree the new administration's policies have shown up in the various economic indicators, Powell said there was evidence that they had, but it was too early to accurately pinpoint or quantify the effects.

“Only in an early way,” he said. “It's only been a few months. We have had two very strong goods inflation readings in the last two months, which is very unexpected. I think [it’s] hard to trace it to specific tariffs. It's either noise and it will come back, and that's very possible too, but if it is persistent then it must be to do with people buying ahead of tariffs, or raising prices ahead of tariffs.”

“Those kinds of things happen, and they are very, very hard to capture, because so much of it is indirect,” he added.

The Fed chair was asked about yesterday’s UCLA Anderson Forecast, which stated that there is a high probability of a recession this year.

“There is always an unconditional possibility of recession,” Powell replied. “It might be broadly in the range of 1 in 4 at any time if you look back through the years. If you look at outside forecasts, a number of them have raised their possibility of a recession somewhat, but still at relatively moderate levels, still in the region of the traditional [range].”

“If you go back two months people were saying that the likelihood of a recession was extremely low,” he added. “So it has moved, but it's not high.”

Asked to expand upon his assertion that a good part of the uptick in the inflation forecast was due to tariffs, Powell pointed to the stalling of projected progress in the Fed’s favored measure of inflation in 2025.

“In the SEP, you will see there's no further progress on core inflation this year,” he said. “We are kind of flatlining, going sideways. We don't expect people to write down how much is from tariffs and how much is not. We know some of it is from tariffs, we know tariffs are coming in, and all forecasters have tariff inflation affecting core CPI inflation. It's in there.”

“I can't tell you how much of that there is,” he added.

Chair Powell was asked about the change to the Fed statement to remove the line that ‘the committee judges that the risk of achieving its employment and inflation goals are roughly in balance,’ and whether this indicates that the central bank is now more concerned about inflation or employment.

“Actually, it does not mean either of those things,” he replied. “It was really not meant to be any signal here. I would say that the more important thing now about  risks […] participants widely raised the estimate of their risks not only to uncertainty, but the risks to growth and our employment and inflation mandates.”

“That's a more salient point now than whether they are in balance.”

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