- Federal Reserve Chair Jerome Powell testifies that the central bank's base case is for the inflationary impact of new tariffs to be short-lived.
- Powell emphasizes the Fed is positioned to prevent these effects from becoming sustained, though he acknowledges they could lead to higher prices.
- The testimony comes amid market uncertainty over how trade policy will influence the timing of potential interest rate cuts.
Federal Reserve Chair Jerome Powell told lawmakers that while new tariffs are likely to raise prices, the central bank's primary expectation is that the inflationary shock will prove temporary. The Fed is closely monitoring the situation but is positioned to prevent these effects from becoming entrenched in the economy, he suggested during his semiannual testimony on Capitol Hill.
"We see the effects on inflation, we think, as likely to be short-lived," Powell said, according to people familiar with his prepared remarks. He has consistently emphasized that tariffs could lead to higher inflation, a concern for markets trying to gauge the Fed's next policy move. The central bank is walking a fine line, acknowledging the potential for short-term price pressures while signaling it could still consider rate cuts to support the economy if the broader disinflationary trend continues.
The comments arrive as the Trump administration's tariff policies have reignited trade tensions, prompting concerns about supply chain disruptions and increased costs for businesses and consumers. Powell noted these measures are likely to slow economic growth, adding another layer of complexity to the Fed's dual mandate of stable prices and maximum employment. When pressed on the matter, Powell reiterated that the Fed's response would be data-dependent, though officials believe they have the tools to manage a temporary spike.
Efforts to reach a Fed spokesperson for additional comment on the timing of potential policy adjustments were not immediately successful. Market participants are now parsing every word for clues on whether a rate cut in the coming months remains a viable option, or if the Fed will be forced to hold steady in the face of tariff-induced price pressures. The base case, according to the Chair, is for the storm to pass without long-term damage to the inflation outlook.