Mr. Jerome Powell said that import tariffs are pushing the US economy onto a path of slower growth, higher unemployment, and higher inflation.
At an event organized by the Economic Club of Chicago on April 16, Chairman of the US Federal Reserve (Fed) Jerome Powell said that major policy changes by US President Donald Trump, including import tariffs, have never happened in current history. This puts the Fed in an unprecedented situation.
"These are fundamental changes. We have no modern experience to refer to," Mr. Powell said. He admitted that so far, the announced import tariff increase is significantly larger than expected and that the prolonged uncertainty surrounding tax policy could cause long-term economic damage.
Mr. Trump's tax policy is pushing the economy onto a path of slower growth, higher unemployment, and higher inflation. These three things happen at the same time. This is a situation the Fed has not faced in about 50 years. "The Fed could find itself in a difficult situation where the dual objectives are in conflict," he added.
The US stock market plunged after Powell's remarks. At the close of trading on April 16, the Dow Jones index lost 700 points (equivalent to 1.7%), the S&P 500 fell 2.5%, and the Nasdaq Composite fell 3.5%.
The Fed is tasked with promoting employment and controlling inflation. Powell said that Trump's tax policies are threatening both of these goals. However, according to the latest data, the US economy is still in a stable state.
Powell said the Fed will not adjust its policy immediately. They need more data to clearly determine the impact of the new policies on the economy.
However, most economists predict that the scenario of rising inflation, rising unemployment, and weakening growth is only a matter of time, especially if the reciprocal tariffs come into effect again after 90 days. So far, Mr. Trump has announced a 25% tariff on aluminum and steel; a 25% tariff on goods from Mexico and Canada; a 145% tax on imports from China; 25% tax on cars, minivans, and auto parts. All of America's trading partners are now also subject to a 10% tax when selling to this country.
"Jerome Powell just gave a clear warning to Mr. Trump about the risk of high inflation, slow growth. It is also a statement that the Fed will not lower interest rates at the White House's call," said David Russell, Director of Global Market Strategy at TradeStation.
Mr. Trump has repeatedly stated that foreigners will have to pay the tax. However, the Fed Chairman emphasized that this is not true. He explained that import tax policies will increase the unemployment rate when the economy slows down. "It is likely that inflation will also increase. In other words, some of the burden of import taxes will be paid by the people," he said.
In the 1970s and early 1980s, the US economy experienced a period of high unemployment and high inflation. At that time, Fed Chairman Paul Volcker prioritized controlling inflation, accepting economic pain.
Many current forecasts show that the US economy is heading in that direction. Chicago Fed President Austan Goolsbee said at an event in New York last week that Mr. Trump's tax policy is putting the Fed in a similar predicament.
"Import tariffs are a supply shock. They make both of the Fed's missions worse at the same time. Prices go up, employment goes down, and growth goes down. There is no playbook for the Fed to deal with this kind of shock," he said.
(according to CNN, Reuters)