Fed Chair Powell gives starkest warning yet on potential economic consequences from tariffs

President Donald Trump's policy changes, especially on tariffs, are unprecedented. Federal Reserve Chair Jerome Powell spoke about this on Wednesday. He said these changes put the Fed in uncharted waters.

Powell noted that the announced tariff increases are much larger than expected. He warned that uncertainty around tariffs could harm the economy long-term. Trump’s tariffs may lead to weaker growth, higher unemployment, and faster inflation simultaneously.

As Powell spoke, US stocks fell sharply. The Dow dropped 700 points, or 1.7%. The S&P 500 fell by 2.5%, while the Nasdaq Composite slid 3.5%. The Fed aims to promote full employment and control inflation, but Trump's tariffs threaten both goals.

Currently, the US economy is still in decent shape based on recent data. Powell believes the Fed should wait for clearer data before making moves. However, many economists predict that Trump's tariffs will eventually raise inflation and unemployment.

So far, Trump has imposed various tariffs:
- 25% on aluminum and steel
- 25% on non-compliant goods from Mexico and Canada
- A massive 145% duty on Chinese imports
- A 25% tariff on cars with more auto parts tariffs coming
- A baseline tariff of 10% on all US imports

The administration has also given temporary exemptions for some electronics. Trump hinted at future tariffs on semiconductors, pharmaceuticals, copper, and timber.

David Russell from TradeStation commented that Powell's remarks were a clear warning about stagflation. He stated that the Fed won't support Trump with rate cuts.

Trump claims foreign countries pay these tariffs; however, Powell disagreed. He explained that Americans will bear part of this burden through rising prices. As a result of these tariffs, unemployment is likely to rise as economic growth slows.

Powell indicated inflation would likely increase too due to these policies. It remains uncertain how much overall inflation levels will rise because of them.

The Fed faces challenges not seen in decades due to potential stagflation risks. In the late '70s and early '80s, high unemployment combined with double-digit inflation created stagflation conditions.

Back then, under Paul Volcker's leadership, the Fed focused on fighting inflation despite economic pain. Current forecasts suggest we might be heading toward similar conditions due to Trump's tariffs.

Chicago Fed President Austan Goolsbee described a tariff as a negative supply shock affecting both sides of the Fed’s dual mandate negatively at once.

If stagflation occurs, Powell said they would assess how far off each goal is from reality and consider different time frames for recovery.

He acknowledged that high unemployment or inflation can hurt communities and businesses significantly. Several Fed officials emphasized monitoring public perceptions of prices closely.

Rising inflation expectations could prompt action from the Fed; however, it remains unclear when this might happen. Inflation is currently slightly above the Fed's target of 2%.

Most officials agree it's best to wait for more data before acting decisively regarding interest rates amid current uncertainties in monetary policy risks.