Inflation is likely to jump amid an economic slowdown – but the Fed chair ruled out a swift rate cut
Federal Reserve chair Jerome Powell said the Trump administration’s tariff war will likely drive inflation higher and slow the US economy, but dismissed the prospect of an imminent interest rate cut as those risks grow.
Speaking Wednesday in an address to the Economic Club of Chicago, Powell highlighted the unprecedented nature of President Trump’s new trade policy, which includes sweeping tariffs on global trading partners and huge levies on most Chinese imports to the US. “There isn’t a modern experience for how to think about this,” he said.
The Fed chief described the extent of Trump’s tariffs as “significantly larger than anticipated” in remarks that sent US stocks plunging as fears grew of a sharp economic downturn.
But even the risk of stagflation – high inflation coupled with a sluggish economy and rising unemployment – likely won’t push the Fed into a premature rate cut. Powell said it would “wait for greater clarity” before potentially bringing rates lower, although he acknowledged a dilemma could arise if inflation spikes while the economy also contracts.
“We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension,” he said.
Don’t expect a Fed rate cut anytime soon
Powell clearly remains in no mood to slash rates just yet. “For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance,” he said in Wednesday’s address.
The Fed chief’s Wednesday remarks mark the clearest indication yet that the central bank is viewing Trump’s trade war with concern, and sparked a fresh stock selloff on Wall Street and a surge toward the bond market.
Fed Chair Powell on independence: "We're never going to be influenced by any political pressure. People can say whatever they want. That's fine. That's not a problem, but we will do what we do strictly without consideration of political or any other extraneous factors." pic.twitter.com/AYH7G7wYnF
— CSPAN (@cspan) April 16, 2025
The S&P 500 fell 2.2% on the day as Powell signaled the economy was probably “moving away” from the Fed’s target “probably for the balance of the year.”
Mortgage market feeling the pain from Trump’s tariffs
The US mortgage and housing markets have also reeled amid Trump’s trade war. The Mortgage Bankers Association (MBA)’s Market Composite Index, which measures overall mortgage loan application volume across the country, dived 7.6% in the week ending April 11, spurred by a 12.4% dip in refinance applications and a 3.8% slide in applications to purchase.
The average 30-year fixed mortgage rate spiked 20 points on the back of bond market chaos, surging to 6.99%, while the 15-year average fixed rate was up 18 points to 6.27%.
Trump has long called for the Fed to immediately bring rates lower and said on April 4 – two days after he launched the so-called “Liberation Day” wave of tariffs – marked the “perfect time” for a rate cut.
Powell’s careful approach has frequently drawn the president’s ire. In January, after the Fed chose to hit pause on a series of rate cuts, Trump accused the central bank of doing a “terrible job” on bank regulation and lowering inflation in a Truth Social post.
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