Image source: Wikipedia

Federal Reserve Board Chair Jerome Powell delivered much-anticipated remarks Friday morning, speaking at a conference in Arlington, Virginia.

His address at the Society for Advancing Business Editing and Writing Annual Conference was booked long ago, but it happened to fall in an historic week for the U.S. economy – when President Donald Trump laid out his massive tariff plan.

So, investors were tuned into what Powell might have to say about the tariffs and their impact on the economy. While the Fed Chair was measured in his remarks, he did not sugarcoat things.

“Looking ahead, higher tariffs will be working their way through our economy and are likely to raise inflation in coming quarters,” Powell said.

Powell stressed that it will be difficult to fully assess the potential economic effects of higher tariffs until there are more details. Specifically, Powell said more information is needed on what will be tariffed, at what level they will be tariffed, and for how long. In addition, it is important to know how trading partners will retaliate.

But after Wednesday’s tariff announcement by Trump, there is more clarity than there was at the last FOMC meeting.

“While uncertainty remains elevated, it is now becoming clear that the tariff increases will be significantly larger than expected,” Powell said. “The same is likely to be true of the economic effects, which will include higher inflation and slower growth. The size and duration of these effects remain uncertain. While tariffs are highly likely to generate at least a temporary rise in inflation, it is also possible that the effects could be more persistent … 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.”

What is the path of monetary policy?

Powell’s remarks on tariffs did not calm investors, as stocks sank even after his speech late Friday morning. The Dow Jones Industrial Average was down about 1,400 points, while the S&P 500 fell 220 points, or 4%, while the Nasdaq was off about 670 points, or 4%.

The Fed chair did say that while uncertainty is high, the “economy is still in a good place. The incoming data show solid growth, a labor market in balance, and inflation running much closer to, but still above, our 2 percent objective.”

While citing “elevated risks” of both higher unemployment and higher inflation, Powell stated that the Fed’s monetary policy stance is well positioned to deal with the risks and uncertainties as it gains a better understanding of the policy changes and their economic impacts.

“It is not our role to comment on those policies. Rather, we make an assessment of their likely effects, observe the behavior of the economy, and set monetary policy in a way that best achieves our dual-mandate goals,” he said.

Powell concluded his remarks by saying the Fed will continue to monitor the data, outlook, and risks.

“We are well positioned to wait for greater clarity before considering any adjustments to our policy stance. It is too soon to say what will be the appropriate path for monetary policy,” Powell said.

While markets did not react favorably, interest rate traders, according to CME FedWatch, are more optimistic for a rate cut in May. About 30% now expect a May rate cut, up from 22% a day ago and 18% a week ago.

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