US Federal Reserve chairman Jerome Powell has rebuffed US President Donald Trump’s demand that something be done to rescue the stock market, as the central bank left interest rates unchanged even as economic data weakens, inflation remains muted and the risk of war rises on all fronts.
Powell said on Wednesday (Jun 19) that the Fed had the luxury of time on the back of a “solid” US economy, and was thus obliged to wait because of the lagging impact of the still unfinalised tariffs on inflation.
As expected, the Fed kept its benchmark rate in a range between 4.25 and 4.5 per cent at the end of its two-day meeting. At his customary press conference, Powell dismissed the recent softening in inflation data and the theory that the upward price pressure caused by the tariffs had been offset by the negative effect of the same duties on demand.
He insisted that the Fed – and all mainstream economists – still anticipated a “burst” of inflation related to trade policy. Among other evidence, he pointed to comments from various US companies, including consumer-product giants Walmart and Kimberly Clark, that are planning to respond to tariffs by raising their prices.
While the Fed’s “dot plot” remains unchanged at a median two rate cuts later this year, Powell stressed that these projections were not made with much conviction.
To calculate the net increase in tariff rates, economists will have to wait until Jul 8, when the Trump administration’s deadline for agreements with China and other nations take effect.
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US stocks pared their earlier gains in the wake of Powell’s statement, and the US dollar strengthened a little. Economists at Standard Chartered said that investors’ impression was that the Fed was “taking the summer off” and was extremely unlikely to make any cuts before the next meeting in mid-September.
The economists said: “The market takeaway was slightly hawkish, probably as a consequence of his repeated emphasis that the economy and labour markets were solid, but that tariffs would boost inflation.”
While Trump pointed a finger at Powell and called him “stupid” for not cutting rates amid the slowdown in economic activity, Powell refused to utter the name of Trump, even when asked about the criticism.
Still, the central bank chief subtly hit back in the blame game, noting that inflation expectations were rising, and that all survey respondents were pointing to the tariffs as the driver.
Later, Powell was even more blunt. He lauded the resilience of the US economy and noted that falling prices in the services and housing sectors were giving the Fed confidence that there would not be another inflation crisis.
Even so, he pointedly noted that the only thing holding the central bank back from rate cuts was the fact that increases in tariffs this year were likely to push up prices and weigh on economic activity.
The Fed’s mission now is to prevent the inevitable one-time increase in price level from becoming a longer-term inflation problem. Powell also noted that falling prices of services and property gave the Fed some assurance that an inflation crisis was not yet on the cards.
He said: “Without tariffs, the Fed’s confidence in inflation outlook would be building.” Analysts interpreted those words as Powell saying that if not for the Trump administration’s trade policy, the central bank would be cutting interest rates and the economy would be in Goldilocks mode – neither too hot nor too cold.
The unprecedented unilateral declaration of a trade war on all the US’ partners has created “a very foggy time” for forecasters, Powell said. There’s now a risk of higher inflation, a risk that slowing global trade spurs unemployment, and a risk that both happen at the same time.
Much depends on who pays the tariffs, he added.
“There are many parties in that chain: the manufacturer, exporter, importer, retailer and consumer,” he noted. “Each of them will be trying to get the next to pay for the tariffs. Maybe one party will pay it all. That process is very hard to predict.”
Another brokerage, meanwhile, argued that this economic fog suggests that the Fed will remain in wait-and-see mode until 2026.
“A large share of the committee has moved towards this view, and we expect the migration to continue as tariff-driven inflation starts to hit the data,” said economists at Bank of America Global Research.
Powell did not address the risk that petrol prices will spike due to the conflict between Israel and Iran. Most strategists say this will become a problem only if Iran takes a drastic step such as mining the Strait of Hormuz, a major chokepoint in global tanker routes.
Recent tentative bullishness in the stock market – which took the S&P500 to the cusp of a record high – could continue at least until tariff inflation finally materialises, or the trade war with China heats up again, said one strategist.
“The comfort level by the Fed and what’s being reflected in the market being near all-time highs really stems from the muted impact of the tariffs on the economy,” said Oliver Pursche, senior vice-president at financial advisory Wealthspire.
