• Federal Reserve Chair Jerome Powell highlights the risk that gradual tariff effects could fuel persistent inflation.
  • The warning comes amid ongoing trade tensions and concerns about the delayed economic impact of import duties.
  • Market participants are watching for potential implications on the Fed's interest rate trajectory.

Federal Reserve Chair Jerome Powell issued a cautious warning about inflation risks on Wednesday, noting that the slow pass-through of tariffs into consumer prices could eventually manifest as more persistent inflationary pressures.

Speaking after the central bank's latest policy meeting, Powell acknowledged that while the initial effects of recent tariffs have been modest, the gradual nature of how these costs work through supply chains presents a distinct challenge for monetary policymakers. "We're watching carefully whether what has been a relatively slow pass-through could begin to accelerate or, alternatively, settle in at a level that contributes to persistence in inflation," Powell told reporters.

The comments reflect growing concern among Fed officials that the delayed economic impact of trade measures could complicate their inflation fight. Recent economic data has shown inflation running above the Fed's 2% target, though the direct contribution from tariffs has been less pronounced than some economists initially projected.

According to people familiar with the matter, Fed staff economists have been modeling various scenarios for tariff impacts, with some projections suggesting the full effects might not materialize for several quarters. This slow-motion transmission makes it difficult for the central bank to respond with appropriate timing.

Market reaction was muted initially, with Treasury yields holding steady and major stock indices showing little movement during Powell's afternoon remarks. However, some analysts noted increased volatility in rate-sensitive sectors as traders digested the implications for future Fed policy.

When asked about the potential policy response, Powell emphasized the Fed would "respond appropriately" if evidence emerges that tariff effects are becoming embedded in inflation expectations. He declined to specify what threshold would trigger a more aggressive stance, noting the need to balance multiple economic indicators.

The Fed chair's comments come amid renewed trade tensions and the implementation of new tariffs on various imported goods. Several business executives, speaking on condition of anonymity, have reported increasing pressure to pass along higher costs to consumers after initially absorbing tariff impacts through reduced margins.

A manufacturing sector representative, who asked not to be named citing ongoing negotiations with suppliers, said "the second-round effects are starting to bite" as companies exhaust their ability to absorb additional costs.

Powell's warning represents a subtle shift in tone from earlier assessments that downplayed tariff impacts as temporary. The Fed now appears more concerned about the structural nature of these price pressures and their potential to become self-reinforcing.

Correction: An earlier version of this article misstated the timing of Powell's comments; they occurred after the Fed's policy meeting on Wednesday.