Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The key points
In an intervention at the SABEW conference on Friday, Fed chair Jay Powell gave an updated assessment of the state of the US economy and the central bank’s likely reaction function two days after the Trump administration’s announcement of sweeping tariffs.
Powell struck a more hawkish tone compared to his most recent public statements in mid-March, indicating — albeit obliquely — that the Fed is more concerned with upside risks to prices.
The verdict
Fed chair Jay Powell’s remarks and subsequent interview on Friday clearly had the primary goal of reassuring markets and indicating that the US central bank has not been jolted by Donald Trump’s “liberation day” tariffs, and that it will instead continue to hold out for hard data confirming the effects of the new trade measures before altering its policy stance. Yet veiled behind his words, there was a definite hawkish tilt from the Fed chair, who had previously suggested that new tariffs may be “transitory”.
For now, we continue to expect the Fed to cut the benchmark rate twice in 2025. However, we have low confidence in our forecast, which is highly contingent on how the new trade war will play out in the coming weeks and whether it will hurt real activity more than it will raise inflation. With little evidence likely to emerge before May, we think the Fed will hold at its next meeting.
The details
Powell’s speech at the SABEW conference on Friday contained two key messages for markets.
The first is that the Fed’s framework for thinking about the US economy has not fundamentally changed, despite the introduction of substantial and highly disruptive universal tariffs by the Trump administration on Wednesday.
“While uncertainty is high and downside risks have risen, the economy is still in a good place,” he said, adding that “many forecasters have anticipated somewhat slower growth this year”.
The implication was that many of the developments that have recently shown up in soft, and more recently, hard data — falling consumer and business confidence and declining consumption — is not an unusual economic development and should not warrant panic.
But while the Fed chair sought to project calm, he also gave clear hints that, at the margin, “liberation day” policies will increase inflationary risks and raise the likelihood of a hawkish response by the central bank.
Powell described the tariffs as “significantly larger than expected . . . the same is likely to be true of the economic effects” and indicated that “it’s possible that the effects could be more persistent [ . . . the Fed’s role is to] make certain that a one-time increase in the price level does not become an ongoing problem”.
This indicated a new hawkish bias relative to the last time Powell spoke after the March press conference. At the time, he had suggested he viewed tariffs as likely transitory.
In addition, the Fed chair reiterated that “our stance is in a good place [ . . . it is] moderately restrictive”. This suggests that the Fed is still primarily targeting the inflation side of its dual mandate, dispelling the notion of any near-term rate cut. The strong payrolls report that came out today suggests no easing is required from the labour market.
With this and the good labour market data out today, we think the Fed is now on a path to pausing for as long as it needs.
More from Monetary Policy Radar
Service sectors led above-expectations job gains of 228,000 in March, but data is unlikely to matter after Trump tariffs
Tariffs will bring back talk of transatlantic divergence, though forces beyond trade also matter
