• Federal Reserve Chair Jerome Powell confirms tariffs are directly pushing up prices for specific goods.
  • New analysis shows tariffs now account for nearly 11% of annual PCE inflation.
  • The Fed's recent rate cut comes amid a complex backdrop of tariff-driven price pressures and a softening labor market.

Federal Reserve Chair Jerome Powell stated Tuesday that higher tariffs are now visibly increasing prices for certain goods, marking a significant shift in the central bank's assessment of trade policy's inflationary impact. The acknowledgment comes as new data confirms what many businesses and consumers have been experiencing firsthand.

Recent analysis shows that tariffs now explain about 10.9% of annual PCE inflation, the Fed's preferred inflation measure. The effects are particularly concentrated in trade-exposed durable goods categories including vehicles, electronics, and furniture, according to people familiar with the matter.

"We're seeing the effects of tariff policy work through specific sectors of the economy," Powell said during his quarterly press conference. "The adjustment process is ongoing and will take time to fully move through supply chains."

The Fed's recognition of tariffs as a meaningful inflation driver comes just as the central bank executed its second 25 basis point rate cut of 2025, bringing the federal funds rate down to 4.75%. This delicate balancing act—easing policy while tariffs push some prices higher—reflects the complex crosscurrents facing policymakers.

Company executives in affected industries confirm they're beginning to pass increased import costs to consumers. "We've seen our input costs rise significantly over the past quarter," said a supply chain director at a major electronics retailer who asked not to be named discussing sensitive pricing matters. "Some of that has to flow through to retail prices."

The timing presents particular challenges for the Fed, which is navigating these tariff effects without complete economic data due to the ongoing government shutdown. The lack of current official jobs and inflation statistics has made policy decisions "historic" in their uncertainty, according to Fed officials.

While the overall inflation rate remains slightly above the Fed's 2% target, the main upward pressure is coming from tariffs rather than broader economic forces. Powell emphasized that the central bank doesn't currently see these price increases triggering a sustained inflationary spiral, as longer-term inflation expectations remain anchored.

Market participants are watching closely how these dynamics unfold. "The question is whether this becomes a one-time price level adjustment or something more persistent," said a portfolio manager at a large asset management firm. "So far, it looks contained to specific goods categories."

The Fed's next moves will depend heavily on incoming data, though officials acknowledge the unusual challenge of setting policy while key economic indicators remain unavailable due to the shutdown.

Correction: An earlier version of this article misstated the percentage of PCE inflation explained by tariffs. The correct figure is 10.9%.