Powell Warns of Tariff-Driven Inflation Spike, Signals Further Interest Rate Cuts

Federal Reserve Chair Jerome Powell highlighted the potential inflationary impact of tariff increases during Tuesday’s speech on the U.S. economic outlook. He emphasized that such measures could lead to somewhat higher inflation, though he expressed confidence in managing these effects to prevent them from becoming a persistent issue.

Powell assured that the central bank would ensure any one-time price surges do not evolve into ongoing inflation challenges. He described a reasonable scenario where tariff-related inflation proves relatively short-lived, while disinflation in the services sector continues apace. Long-term inflation expectations, he noted, remain aligned with the Fed’s 2% target, providing a stable foundation for policy decisions.

Addressing recent economic indicators, Powell pointed out that goods price increases are primarily driven by tariffs rather than widespread pressures. He estimated that the 12-month PCE inflation rate likely stood at 2.7% in August, with core PCE at 2.3%—both figures higher than the previous year and influenced heavily by goods costs. Consumer spending has moderated, he added, with businesses reporting that uncertainty is clouding their future plans.

The labor market presents unique challenges, according to Powell, with a notable decline in both supply and demand for workers. He described the market as less dynamic and somewhat softer overall. Despite these shifts, inflation has risen but remains somewhat elevated, while economic growth has slowed and downside risks to employment have increased. Powell reiterated that long-run inflation expectations are consistent with the 2% goal, underscoring the absence of a risk-free path forward for monetary policy.

This speech follows the Federal Reserve’s September policy meeting, where officials reduced the policy rate by 25 basis points to a range of 4%-4.25%. The updated Summary of Economic Projections indicated an additional 50 basis points of cuts in 2025, followed by 25 basis points each in 2026 and 2027.

In the subsequent press conference, Powell characterized the rate adjustment as a precautionary “risk management cut,” acknowledging heightened risks to employment while anticipating continued tariff-driven price pressures through the current year and into the next. Markets are pricing in a high likelihood of two more rate reductions in 2025 as the Fed navigates these evolving dynamics.