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- It’s too soon to say what will be the appropriate path for monetary policy
- Tariffs likely to raise inflation in coming quarters; more persistent effects possible
- Highlights uncertainty about persistence of tariffs and retaliation
- Becoming clear that tariffs will be significantly larger than expected, the same is true of the economic effects
- Says higher inflation and slower growth will be results of tariffs
- More measures of long-term inflation remain well-anchored
- Obligation is to make certain that one-time increase in price levels doesn’t become an ongoing inflation problem
- Outlook is highly uncertain, with elevated risks of higher unemployment and higher inflation
- Surveys show dimming expectations, higher uncertainty due to new Federal policies, especially trade
- Fed is closely watching tension between hard and soft data
There will be a Q&A after the speech. The kneejerk reaction has been a modest decline in rate cut probabilities in the near term. Risk assets have edged lower.
This is about what I expected to hear but markets are pricing in a 40% chance of a cut in May and 31 bps in June. That means that markets see a dovish shift from the Fed in the next month. That didn’t come today as Powell mostly punted with these comments.
Still, the worst-case scenario was avoided, where he might say that tariffs would boost inflation and make it impossible for the Fed to cut rates.
Here is the key passage:
We have stressed that it will be very difficult to assess the likely
economic effects of higher tariffs until there is greater certainty
about the details, such as what will be tariffed, at what level and for
what duration, and the extent of retaliation from our trading partners.
While uncertainty remains elevated, it is now becoming clear that the
tariff increases will be significantly larger than expected. The same is
likely to be true of the economic effects, which will include higher
inflation and slower growth. The size and duration of these effects
remain uncertain. While tariffs are highly likely to generate at least a
temporary rise in inflation, it is also possible that the effects could
be more persistent. Avoiding that outcome would depend on keeping
longer-term inflation expectations well anchored, on the size of the
effects, and on how long it takes for them to pass through fully to
prices. Our obligation is to keep longer-term inflation expectations
well anchored and to make certain that a one-time increase in the price
level does not become an ongoing inflation problem.
It was a very short speech overall and he went right to questions:
