Fed Chair Powell Highlights Inflation Risks from Tariffs and Signals Caution on Rate Cuts

On June 25, Federal Reserve Chair Jerome Powell addressed the Senate Finance Committee, expressing his concerns about the inflationary risks associated with the Trump administration’s proposed tariff plans. Powell warned that while tariffs might cause a one-time price surge, the potential for longer-lasting inflation cannot be dismissed. He emphasized the Fed's responsibility to maintain price stability and highlighted the need for a cautious approach to monetary policy under the current complex economic conditions. His remarks also reflected the ongoing policy divergence between the Fed and the Trump administration.

Powell stated that the proposed tariffs are likely to result in a one-time increase in prices, but such impacts are not necessarily confined to the short term. He noted that while economic theory assumes tariff-related price shocks are transient, this outcome is not guaranteed and will depend on the scope, implementation, and public reaction. If tariffs lead to higher costs, supply chain restructuring, or a shift in inflation expectations, their impact could be more persistent. Powell asserted that the Fed must carefully manage this risk and would remain prudent when considering further rate cuts, awaiting more comprehensive data on the tariffs’ effects.

He explained that the Fed’s current decision to keep interest rates unchanged is closely tied to uncertainty surrounding the potential impact of the tariffs. Powell reiterated that policy missteps could impose significant long-term costs on the public. He stressed the importance of understanding whether tariffs will lead businesses to adjust pricing strategies and whether consumers might alter their behavior in anticipation of higher prices. Until clearer data emerges, the Fed will not act hastily.

Powell also addressed the limited value of using the 2018 tariff experience as a reference, pointing out that the scale and context differ significantly. He said that the tariffs implemented in 2018 were narrower in scope and occurred during a period of low inflation. The current proposals are broader and come amid more complex global economic dynamics, which could see inflation start to rise as early as June or July. The Fed is monitoring developments closely to determine whether policy adjustments will be needed.

His comments also highlighted the political tensions between the Fed and the Trump administration. While Trump has pushed for immediate rate cuts, Powell maintained that such decisions must be grounded in data, not political influence. Republican Senator Bernie Moreno questioned Powell’s objectivity, suggesting his inflation concerns were politically biased. Moreno also pointed out that although Powell was appointed by Trump, the former president now appears eager to replace him.

Conversely, other Republican lawmakers backed Powell’s cautious stance. Senator Thom Tillis noted that even large retailers like Walmart struggle to predict the impact of tariffs on prices and demand, emphasizing the need for realism when assessing inflation risks.

While Powell’s testimony did not alter market expectations for monetary policy, investors still anticipate two rate cuts this year. However, uncertainty remains around the timing and magnitude of such actions. The Fed is waiting for the outcomes of trade talks and more data on how tariffs affect the economy. Powell noted that if summer data shows weaker-than-expected price transmission from tariffs, the Fed may be more inclined to cut rates. On the other hand, if inflation accelerates, a more cautious approach will be necessary.

Trump has already begun narrowing down candidates to replace Powell when his term ends in May 2025, reportedly considering “three or four” individuals. This has added to speculation about the future direction of Fed policy.

In the short term, gold prices could experience dual pressures. Inflation expectations and safe-haven demand might support prices, while the Fed’s potential to maintain high interest rates could exert downward pressure. The outlook will depend on geopolitical developments, inflation data, trade negotiations, and market expectations of Fed policy. Investors are closely watching the actual impact of tariff policies and the Fed’s subsequent responses to assess future trends in gold