The Fed’s Worst Nightmare? Inflation and Recession at the Same Time

Federal Reserve Chair Jerome Powell cautioned on Wednesday that President Trump’s newly imposed tariffs could place the central bank in a difficult bind—facing the prospect of both rising inflation and slower economic growth, complicating decisions on future interest rate policy.

Speaking in Chicago, Powell said the Fed would hold off on adjusting interest rates until it gains “more clarity” on the economic consequences of Trump’s early-April tariff expansion. 

Also read: Oppenheimer Cuts Coinbase Forecast Amid Trump Tariff Fallout

He warned that the tariffs could force the Fed to navigate conflicting priorities. “We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension,” he said, referring to the central bank’s dual mandate to maintain price stability and support maximum employment.

With economic growth and job creation already showing signs of softening, the additional inflationary pressure from tariffs may place the Fed in a difficult position. Powell acknowledged that officials could face “a very difficult judgment” about which side of the mandate to prioritize. In such a scenario, policymakers would need to assess how far the economy is from its targets—and how long it might take to return to them.

At a Crossroads: Balancing Growth and Inflation

While inflation has remained elevated in recent years, Trump’s tariff announcement—dubbed “Liberation Day” by markets—has sparked volatility across financial markets. 

Powell described the current period as “historically unique,” noting that markets are reacting in line with the uncertainty surrounding such a significant policy shift.

Also read: Presidential Overreach on Trial: NCLA Seeks Judicial Review of China Tariffs

Beth Hammack, president of the Cleveland Fed, echoed Powell’s concerns. Speaking Wednesday in Ohio, she said that early data from the first quarter suggest a slowdown in economic momentum, with consumers and businesses growing more cautious. 

She argued that holding rates steady remains appropriate for now, but if economic conditions deteriorate and inflation eases, the Fed could consider rate cuts—possibly “even quickly.”

12-month percentage change, Consumer Price Index (Source: US Bureau of Labor Statistics)

Tariff-Driven Inflation: Temporary or Lasting?

A central question facing the Fed is whether the inflation caused by tariffs will be fleeting or persistent. While Powell and other officials initially viewed the price effects as “transitory,” the Fed chair struck a more cautious tone this week. 

Amid speculation that the Trump administration may seek to influence the central bank’s decisions or leadership, Powell reaffirmed the Fed’s independence, calling it a “matter of law.” He said a Supreme Court case testing presidential authority over independent agencies is unlikely to affect the Fed but confirmed the institution is “monitoring it carefully.”

Also read: Trump Promises ‘Make America Wealthy Again’ — Will Tariffs & Tax Cuts Backfire?

Despite the uncertainty, financial markets are currently pricing in two to three rate cuts this year. Powell emphasized that policy decisions will depend on how tariffs affect inflation, growth, and employment in the coming months.