Federal Reserve Chair Jerome Powell said that the economy is in a “solid position” as the central bank monitors inflation and labor market data for signs that it needs to adjust monetary policy.
“Despite elevated uncertainty, the economy is in a solid position. The unemployment rate remains low, and the labor market is at or near maximum employment,” Powell said in his opening testimony before the House Financial Services Committee on Tuesday.
“Inflation has come down a great deal but has been running somewhat above our 2% longer-run objective. We are attentive to the risks to both sides of our dual mandate,” the chair said in reference to the Federal Reserve’s dual mandate to promote stable prices over the long-run as well as maximum employment.
The Fed has held off on cutting interest rates due to uncertainty over trade policy, as President Donald Trump has imposed tariffs on U.S. trading partners. Tariffs are taxes on imports that are generally paid by the importer, who often passes some or all of those additional costs on to consumers.
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“The effects of tariffs will depend, among other things, on their ultimate level. Expectations of that level, and thus of the related economic effects, reached a peak in April and have since declined,” Powell said.
“Even so, increases in tariffs this year are likely to push up prices and weigh on economic activity,” he said. “The effects on inflation could be short-lived – reflecting a one-time shift in the price level. It is also possible that the inflationary effects could instead be more persistent.”
“Respondents to surveys of consumers, businesses, and professional forecasters point to tariffs as the driving factor. Beyond the next year or so, however, most measures of longer-term expectations remain consistent with our 2% inflation goal,” he added.
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Powell was asked about when inflation from tariffs could begin to manifest itself in the data, and he explained that when he talks to retailers he often hears that much of what’s currently being sold was in inventory before tariffs took effect.
“We do expect tariff inflation to show up more, but I want to be honest, we really don’t know how much of that is going to be passed through to consumers. We just don’t and we won’t know until we see it. It could be lower than we expected, it could be higher. We have to wait and see which is kind of what we’re doing,” Powell explained.
The Fed’s three interest rate cuts last year – including the 50-basis-point cut in September as well as the two 25-basis-point cuts in November and December – were discussed as a lawmaker asked whether conditions are similar now and could lead to a rate cut.
“The unemployment rate had actually gone up almost a full percentage point – I was very clear about this, we were very clear about this in realtime. There really hadn’t been an experience in the modern era in which the unemployment rate has gone up close to 1% that hasn’t been followed by much higher levels of unemployment and a recession,” Powell said.
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He noted that the federal funds rate was at a “very restrictive level” of 5.3% and the Fed was the last of the big central banks to cut, so the September cut was aimed at supporting the labor market.
Powell also noted that last fall, inflation was projected to continue falling, which stands in contrast to current expectations that inflation will rise in the months ahead.
“If you just look at the basic data and you don’t look at the forecast, you would say that we would have continued cutting. The difference of course, is at this time, all forecasters are expecting pretty soon that some significant inflation will show up from tariffs,” Powell said. “We can’t just ignore that… We’re just saying, let’s wait and see more.”
This is a developing story. Please check back for updates.
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