Chicago: Chair of the US Federal Reserve Jerome Powell expressed concerns that the economic policies of the new Administration could lead to higher inflation and slower growth, creating a challenging environment for the Federal Reserve as it seeks to balance its dual mandates of employment and price stability.
According to Kuwait News Agency, Powell, speaking at the Economic Club of Chicago, emphasized the Fed's focus on achieving its dual-mandate goals as set by Congress. He acknowledged that while the US economy remains solid and the labor market is at or near maximum employment, inflation is slightly above the Fed's two percent target.
Powell highlighted that initial data for the first-quarter GDP suggests a slowdown in growth compared to the previous year, despite strong consumer spending in certain sectors like motor vehicles. He noted that strong imports, likely due to businesses anticipating potential tariffs, could impact GDP growth. Declining sentiment and uncertainty about trade policies are also contributing to lower growth forecasts for the year.
Discussing the labor market, Powell revealed that nonfarm payrolls grew by an average of 150,000 jobs per month in the first quarter, with low layoffs and stable unemployment rates. He noted that wage growth continues to outpace inflation, indicating a balanced labor market that is not contributing significantly to inflationary pressures.
On the issue of price stability, Powell stated that inflation has eased from its pandemic highs but remains above the Fed's target. He warned that the new Administration's substantial policy changes in trade, immigration, fiscal policy, and regulation could further impact inflation and growth. He specifically pointed out that announced tariff increases are larger than expected and could lead to higher inflation and slower growth.
Powell addressed the monetary policy implications, suggesting that tariffs are likely to cause at least a temporary rise in inflation. He stressed the importance of anchoring long-term inflation expectations to prevent a one-time price increase from becoming an ongoing issue. The Fed's obligation, he stated, is to maintain price stability to achieve prolonged periods of strong labor market conditions.
In conclusion, Powell acknowledged the possibility of a scenario where the Fed's goals of maximum employment and price stability might be in tension, requiring careful consideration of how to close the gaps in achieving these objectives over different time horizons.