CHICAGO: The US central bank has said it is pausing any changes to interest rates, as concerns grow that rising tariffs could drive up inflation while weighing on economic growth.

US Federal Reserve chair Jerome Powell said Wednesday that the Fed would wait for more data on the economy’s direction before changing interest rates, and characterised recent market volatility as a logical reaction to the Trump administration’s dramatic shifts in tariff policy.

“For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance,” Powell said in prepared remarks to the Economic Club of Chicago. 

His remarks noted a potentially tough situation developing for the Fed, in which inflation is pushed higher by tariffs while growth — and potentially employment — weakens.

The Fed tries to keep inflation stable at 2% while sustaining maximum employment as well.

“I do think we’ll be moving away from those goals, probably for the balance of this year. Or at least not making any progress,” Powell said, referring to the impact of tariffs that have proved larger — at least as announced — than even the most severe scenarios pencilled into initial Fed planning estimates. He noted that the US began the year around full employment and with inflation expected to continue falling to the central bank’s target.

The outlook has now become extremely uncertain, Powell said, with “fundamental changes” in policy that offer businesses and economists no clear parallels to study.

In his first public remarks on recent financial volatility, Powell said he felt that bond and stock markets were functioning well, with the swings in security values reflecting investors adjusting to the new landscape.

Asked if there is a “Fed put” — where the central bank would step in if markets plummet — Powell said, “No, with an explanation… Markets are processing what’s going on… markets are struggling with a lot of uncertainty and that means volatility. But having said that, markets are functioning… Conditional on being in such a challenging situation, markets are doing what they’re supposed to do. They’re orderly and they’re functioning just about as you would expect them to function.”

US stocks, already down on the session before Powell spoke, extended their losses afterwards.

“I think people were expecting Powell to be neutral and he was hawkish instead,” said Jim Carroll, senior wealth adviser at Ballast Rock Private Wealth in Charleston, South Carolina, about the additional losses in stocks following Powell’s appearance. “When asked if there’s such a thing as a Fed put for the stock market, his answer was ‘no’.”

Heightened Uncertainty

In his prepared remarks, Powell said US economic growth appears to be slowing, with consumer spending growing modestly. A rush of imports to avoid tariffs is also likely to weigh on estimates of gross domestic product, with sentiment worsening.

“Despite heightened uncertainty and downside risks, the US economy is still in a solid position,” Powell said. But “the data in hand so far suggest that growth has slowed in the first quarter from last year’s solid pace.”

External analysts see growth continuing to slow over the year, while “households and businesses report a sharp decline in sentiment and elevated uncertainty about the outlook, largely reflecting trade policy concerns,” Powell said, referring to the rapid changes in import taxes imposed by President Donald Trump.

The Fed’s benchmark interest rate is currently set in a range between 4.25% and 4.5%, where it has remained since December following a series of rate cuts late last year.

Since then, progress on restoring inflation to the Fed’s 2% target has slowed.

Despite the uncertainty and the back-and-forth nature of Trump’s tariff announcements, a judgment about their likely impact will be central to upcoming Fed debate over whether to leave the benchmark interest rate unchanged, lower it — or even consider rate increases.

“Tariffs are highly likely to generate at least a temporary rise in inflation. The inflationary effects could also be more persistent,” Powell said. “Avoiding that outcome will depend on the size of the effects, on how long it takes for them to pass through fully to prices, and, ultimately, on keeping longer-term inflation expectations well anchored,” an aim Fed officials have begun to emphasise.

While measures of inflation expectations over short-term periods “have moved up significantly” because of tariffs, Powell said the longer-term expectations that the Fed watches most closely remain consistent with the Fed’s inflation goal.

With the Fed also keeping an eye on employment, Powell said the labour market remained “in solid condition” and “at or near maximum employment”.

But should the Fed get caught between rising inflation and a rising unemployment rate, “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.”