Jerome H. Powell warned that Trump’s tariffs could lead to a “challenging scenario” for the central bank.
As President Trump’s trade policy has started to take shape, officials at the Federal Reserve have been more vocal about how such sweeping tariffs will affect the economy.
In a recent speech, Jerome H. Powell, the chair of the central bank, warned that levies of the scope and scale Mr. Trump is pursuing would most likely lead to even higher inflation and slower growth than initially expected — the makings of what’s known as a stagflationary shock.
Mr. Powell expanded on those remarks on Wednesday, laying out in greater detail how the Fed would deal with a situation in which its goals for a healthy labor market as well as low and stable inflation clashed with one another.
“We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension,” Mr. Powell said in a speech at the Economic Club of Chicago. “If that were to occur, we would consider how far the economy is from each goal, and the potentially different time horizons over which those respective gaps would be anticipated to close.”
The recent whiplash over which products are subject to tariffs, by how much and for how long, has stoked extreme uncertainty about the economic outlook, leading to diverging views about when the central bank may be able to cut interest rates again.
So far, most officials have taken the view that the inflationary impact from tariffs should not be underestimated, especially in light of certain measures of inflation expectations that show consumers starting to anticipate higher prices. Mr. Powell on Wednesday again warned that Mr. Trump’s policies could breed persistently higher inflation and reiterated that it was the Fed’s “obligation” to ensure that “a one-time increase in the price level does not become an ongoing inflation problem.”