Jerome Powell’s remarks at the Economic Club of Chicago on August 20. He noted the Fed’s persistent challenge of curbing inflation without stifling economic development. He added that the Fed could be in an unpleasant position. As a practical matter, it can and should balance its employment-maximizing goal with its dual mandate to maintain stable prices.
Powell’s comments don’t come a moment too soon, as inflation fears are growing. Survey and market indicators alike point to a rise in near-term inflation expectations. The trend in the long-term outlook remains consistent with the Fed’s goal of 2%. As Powell reminded us, we cannot lose our guard on inflation expectations.
The Chair stated, “We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension.” One of those two things is a numerical measure of how far the economy is from each goal, he said. Further, they will look at the various timelines required to reach those goals.
In his remarks, Powell specifically pointed to the damage that tariffs are likely to cause. A danger, he’s argued, that would make the Fed’s job even tougher to do. He noted that tariffs are “highly likely to generate at least a temporary rise in inflation,” adding that these measures might divert the economy from its goals, particularly in the near term. “Tariffs are likely to move us further away from our goals… probably for the balance of this year,” he remarked.
Powell’s remarks come in the context of a strong report from the Commerce Department yesterday. The March retail sales report came in well above expectations showing a 1.4% jump on the month. That’s a really good sign, he pointed to this bright spot. He cautioned that data indicates a first quarter slowdown, especially following strong growth from last year.
He described the prevailing economic stance as “solid,” but conceded persistent risks to both growth and inflation. Powell was careful to note that despite the recent slowdown, the economy still has a lot of underlying strengths. He reassured listeners that, “For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance.”
As worries about runaway inflation return to the economic discussion, Powell pulls out another significant number. The Fed’s preferred inflation measure is expected to be at 2.6% come March. This figure reflects the growing pressures on prices and reinforces his assertion about the importance of keeping longer-term inflation expectations well anchored.
The ongoing discourse about the effects of tariffs on inflationary pressures and economic growth highlights the precarious point at which monetary policy finds itself. Powell’s insights highlight the importance of external factors in the pursuit of our domestic economic goals. The Fed will have to continue threading the needle on these complexities whenever it decides.
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