Powell Says the Fed Is in No Hurry to Adjust Rates Amid Trump Policy Uncertainty

Jerome H. Powell, chair of the Federal Reserve, said the central bank is focused on the “net effect” of President Trump’s sweeping economic agenda amid high uncertainty about which policies will actually be enacted, as he reiterated that officials are still not in a “hurry” to adjust interest rates.

“As we parse the incoming information, we are focused on separating the signal from the noise as the outlook evolves,” Mr. Powell said at an event on Friday. “We do not need to be in a hurry, and are well positioned to wait for greater clarity.”

If inflation stays sticky but the economy remains strong, the Fed chair said the central bank can “maintain policy restraint for longer.” But if either the labor market were to weaken more than expected, or inflation were to rapidly decline, Mr. Powell said officials can “ease policy accordingly.”

His comments underscore the delicate balancing act that Fed is trying to navigate at a tenuous moment for the economy.

In an interview on Friday, Austan D. Goolsbee, president of the Chicago Fed and a voting member on this year’s policy-setting committee, warned that a situation in which inflation stayed sticky while growth deteriorated at the same time would be a “harder problem” for the Fed to solve and something that is increasingly “on the radar screen” as a result of the policies that Mr. Trump is pursuing.

“Tariffs on intermediate goods are a negative supply shock,” he said, referring to goods that are used to make other products and services for consumers. “If there were large negative supply shocks that were to hit the economy, they would have a tendency to both drive down employment and drive up prices.”

“That’s a stagflationary impulse,” he later added. “There isn’t a generic answer to what you’re supposed to do.”

Speaking at the same event earlier on Friday, Michelle Bowman, a Fed governor, said that as inflation returns to the central bank’s 2 percent target, the labor market and economic activity “will become a larger factor” in policy discussions.

The Fed is expected to hold interest rates steady at 4.25 percent to 4.5 percent when officials gather March 18-19, extending a pause that has been in place since January. But its decisions after that point may get more fraught, especially if the economy weakens and price pressures rise to the extent that economists fear.

How significantly Mr. Trump’s tariffs will impact the economy is not yet known. The president has already flip-flopped on levies he placed on Mexico and Canada this week, but has kept the threat alive by issuing only a short-term reprieve. Sweeping retaliatory tariffs are also still on the table, as are other penalties on aluminum, steel and other products. The size of the potential impact depends not only on the duration of the policies but also how fervently other countries protect themselves with retaliatory measures and how businesses and consumers adapt to higher costs.

The Fed is having to consider these implications alongside other policies Mr. Trump is pursuing, including mass deportations and steep cuts to government spending, which are expected to drag down growth. Tax cuts and deregulation efforts, which make up the other part of the president’s economic agenda, may act as an offset and help to bolster business activity, but to what extent is unclear.

What has given officials at the Fed some comfort is that the economy Mr. Trump inherited has a solid foundation. In fact, new data released on Friday showed that hiring held steady in February, as the unemployment rate ticked up to 4.1 percent. That sturdiness may mean it will require a very significant blow for the economy to be knocked into a recession.

Still, the volatility alone has been enough to prompt concern about the economic outlook, with measures tracking consumer sentiment suggesting there has been a significant deterioration in how confident Americans are feeling. Many economists have also lowered their forecasts for growth, and policymakers have taken notice, too.

Mr. Goolsbee said the backdrop still appeared “fairly strong, but he was increasingly hearing from companies in his district about an “uncertainty-induced chill, especially to business investment.”

Pointing to recent measures of sentiment and other “soft data,” Christopher J. Waller, a Fed governor, added on Thursday that those gauges suggest “maybe things are not going be quite as good on the real side of the economy.”

On Friday, however, Mr. Powell sought to strike a more positive tone, saying that “despite elevated levels of uncertainty, the U.S. economy continues to be in a good place.” Sentiment data, meanwhile, “have not been a good predictor of consumption growth in recent years.”

The growth scare comes as Americans are also bracing for higher consumer prices, a toxic combination that will make the Fed’s job more challenging.

After failing to spot the pandemic-era inflation problem quickly enough, and with price pressures from that episode still lingering, the Fed is being careful not to make the same mistake again. Since Mr. Trump was re-elected, officials at the central bank have raised their forecasts for inflation for the year and some have more recently drawn a direct link to the president’s policies.

Mr. Powell noted that consumers who are raising their expectations about inflation cited tariffs as a “driving factor,” even as he stressed that longer-run measures which are more indicative of the trajectory for inflation were “stable.” In a moderated discussion after his speech, he suggested that tariffs would end up impacting prices to some extent, but that the policy response would depend on whether it was just a one-off increase or if there were a series of shocks.

Mr. Goolsbee expressed concern that the frequent changes to trade policy could ultimately prove problematic. “The fact that it’s changed multiple times in a short period also raises the question of, would this be a one time cost shock?”

Earlier this week, John C. Williams, president of the New York Fed and a top ally of Mr. Powell, said he expected tariffs to stoke higher inflation as those effects “filter into prices that consumers pay.”

Even Mr. Waller, who previously said the Fed can “look through” the effects of tariffs, acknowledged on Thursday that the impact of the recent levies risks being “much larger” than he initially expected.

The latest Beige Book released by the Fed this week, which tracks economic conditions across the country, showed businesses bracing for the same. Most surveyed across the 12 districts that make up the Federal Reserve system said they planned to raise prices as a result of tariffs, with some even pre-emptively doing so.

Against this backdrop, officials have been consistent in their support of the Fed holding firm on rate cuts until it sees more evidence that inflation is moving back down to the central bank’s target or the labor market unexpectedly weakens.

Financial markets are betting those conditions will be met by its June meeting, allowing the Fed to lower rates by 0.75 percentage point this year.