CHICAGO (WLS) — The Trump administration’s rapidly changing trade policies have left America feeling unsettled, but Federal Reserve Chair Jerome Powell reassured that there is no cause for concern.
“Despite the high levels of uncertainty, the US economy remains strong,” Powell stated during an event held at the University of Chicago. “Recent sentiment indicators have not been accurate predictors of consumer spending growth.”
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“We do not need to be in a hurry, and are well positioned to wait for greater clarity,” he said.
The back-and-forth nature of the Trump administration’s trade policies has created a sense of unpredictability for American decision-makers. A Federal Reserve survey revealed that some businesses feel the changes are “affecting their ability to make confident decisions and take risks.” The impact of this uncertainty has also been reflected in the stock market, with both the S&P 500 and the Nasdaq experiencing significant declines.
Consumers aren’t taking the uncertainty too well, either. The Conference Board’s Consumer Confidence Index plunged in February over fears of Trump’s tariffs, as expectations of higher inflation climbed.
America’s souring economic mood comes at a time when the US economy has shown early signs of slowing, but also of stubbornly elevated inflation – a toxic combination sometimes referred to as stagflation. Fed officials are now waiting to see if that twin threat materializes and some have already started to lay out how the central bank should respond if it does.
Factoring in Trump’s uncertainty
Fed policymakers manage uncertainty by trying to predict the different ways the economy could evolve in the coming months, based on economic models using a vast array of data.
Still, the Trump administration’s rapid policy changes are putting officials at the US central bank in an uncomfortable wait-and-see posture.
“The question is, how does this all sort out?” Atlanta Fed President Raphael Bostic said Thursday at an event in Alabama. “I’d be surprised if we got a lot of clarity before the late spring into summer.”
Powell echoed that sentiment in his Friday speech, saying “we continue to carefully monitor a variety of indicators of household and business spending.”
The Fed leader said how officials respond to Trump’s policies depends on “the net effect of these policy changes that will matter for the economy and for the path of monetary policy.”
“It’s not simply what’s happening with tariffs, it’s what’s happening with growth and all the other things as a result of these broad changes in economic policy, not just tariffs,” Powell said.
St. Louis Fed President Alberto Musalem this week said that he expects the economy to continue to chug along, but noted that it’s important for the Fed to brace for the worst.
“While I believe the economy will continue to expand at a solid pace, with a healthy labor market and inflation converging to 2%, as economists we must admit there are other plausible scenarios,” Musalem said. “A less favorable but plausible scenario must also be considered. In this scenario, inflation stalls above 2% or rises while at the same time the labor market weakens.”
He said the Fed could begin to hike rates “if above-target inflation is sustained, or longer-term inflation expectations rise.”
Various consumer surveys have showed that consumers’ expectations for inflation in the coming years have ratcheted higher, though Musalem and other officials have said they still remain in check – for now.
Are rate cuts this year still on the table?
The Fed still isn’t done dealing with inflation, but there might also be some early signs of a slowing economy at the same time.
There was little progress in the final months of 2024, which was a big reason why officials stopped cutting rates in January, after delivering three back-to-back rate cuts last year. The job market’s resilience also meant the Fed could comfortably stop cutting rates.
Employers continued to hire at a solid pace in February, and while unemployment edged higher, it remained relatively low last month. But there has been evidence of weakness in other pockets of the economy.
Consumer spending, the driver of the US economy, unexpectedly fell in January from the prior month, according to Commerce Department data, the first monthly decline in nearly two years. Home sales and residential construction slumped in the beginning of the year.
“If economic conditions sour just when tariffs are kicking up inflation, then the Fed has a hellishly tough decision to make. For them, there is no greater nightmare than stagflation,” Bernard Bauhmol, chief global economist at The Economic Outlook Group, said in analyst note this week.
“Should the Fed lower interest rates to keep the economy out of recession and therefore relegate the fight against inflation? Or, ought monetary policy remain restrictive in order to keep consumer prices from accelerating even if it is likely to cause more economic weakness?”
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