Key Takeaways

  • Federal Reserve Chair Jerome Powell said Wednesday that the central bank will hold its benchmark interest rate steady to determine whether tariff-driven inflation is temporary or persistent.
  • Testifying before the Senate Banking Committee, Powell noted that decisions require caution given that tariff effects could last longer and their scale is uncertain. He mentioned that current U.S. import tariffs are the highest and broadest since the 1930s.
  • Powell said one scenario is that tariff-induced price pressures "appear quickly and fade quickly," similar to a shock from an oil price surge; however, he also cautioned that tariffs could trigger "a process that lasts for several years, with multiple shocks," or the shock could be very large in scale.

Deeper Analysis

Powell reiterated to lawmakers that Fed officials projected on June 18 that they still expect cumulative rate cuts of 0.5 percentage points by the end of 2025, despite higher price pressures from tariffs. Policymakers have kept the federal funds rate in a range of 4.25% to 4.5% since December.

"Most of my committee colleagues indicate they expect rate cuts at the remaining four meetings of 2025," Powell said.

Since last week's central bank meeting, two policymakers have indicated they may lean toward a 25-basis-point rate cut at the July 29-30 meeting. Both warned of potential labor market weakness and noted that inflation has cooled.

During the same period, interest rate futures traders raised the probability of a 25-basis-point rate cut next month to 24.8% from 12.5%, according to the CME FedWatch tool.

"We have to be humble about our estimates of the impact of tariffs on inflation," Powell said. "What makes it so challenging is that there really is no precedent in the modern economy for the scale of import taxes set by the Trump administration."

According to the Yale Budget Lab, as of June 17, the overall effective tariff rate faced by consumers was 15.8%, the highest level since 1936.

The Yale Budget Lab said on June 17 that if tariffs remain at current levels, consumer prices would rise by 1.5% in the short term, equivalent to an average loss of $2,000 in real income per household.

The institution also noted that import tariffs would disproportionately raise prices of clothing and textiles, with footwear prices potentially rising 33% and clothing prices rising 28% in the short term.

Powell said Fed policymakers have not prejudged the duration of tariff-driven inflation.

"We are very open to the possibility that the pass-through of tariffs to inflation could be lower than we expect, or higher than we expect, and that is exactly why we prefer to take time to observe developments and make informed decisions," he said.

In testimony before the House Financial Services Committee on Tuesday, Powell did not rule out a rate cut at next month's policy meeting.

"If it turns out that inflation pressures are indeed under control, then we would cut rates sooner rather than later," he said. "But I don't want to point to any specific meeting."