Fed Chief Warns Tariffs Will Slow Growth and Raise Consumer Prices

Jerome Powell, the Chair of the Federal Reserve, has a clear and cutting warning regarding the new wave of tariffs from the Trump administration: The economic fallout could be more severe than many expect. In an appearance before the Economic Club of Chicago, Powell said that the actual scale of the new taxes on imports, especially those aimed at goods from China, far exceeded the Fed's earlier projections. We now see the U.S. economy as headed for slower growth and an inflation rate that will be stronger than previously believed.

The U.S. has recently put a 10% tax on imports from most countries and a 145% tax on goods from China. When you account for existing tariffs, the effective rate on certain Chinese products is 245%. Exemptions for smartphones aside, the overall impact is bound to be huge. China, in turn, has slapped a 125% tax on exports from the U.S.

Investor Confidence Wanes Amid Market Volatility

International stock exchanges have been reacting very sharply to the unfolding trade tensions. This past week, right in the middle of the unfolding situation, all three major U.S. indices took quite notable drops. News reports this weekend, however, were even more unsettling, as they conveyed the idea to investors that all was not well out there, and that a gathering storm was on the horizon. Beyond the equity markets, a more troubling trend was emerging as well, the sale of U.S. government debt.

U.S. bond yields surged, necessitating the government to boost interest rates even more to entice buyers. Rates have since settled down but are still higher than most people would like.

Households and Businesses Report Sharp Decline in Outlook

Recent surveys indicate consumers and businesses have become much less confident. The sudden increase in tariffs has been one of the major culprits behind this drop in sentiment. Powell said many people now fear the tariffs are going to result in much higher prices and that the whole tariff situation is going to create a lot of economic uncertainty. Of course, the Trump administration sees the tariffs as a way to bring back a lot of manufacturing that has gone overseas and as a way to create a lot of new jobs.

He said that the full impacts are still coming to light and could necessitate the Fed to maintain a vigilant watch over how the developing economic conditions play out. Even with the turbulence, Powell reassured everyone that the U.S. economy is still on stable footing. For now, the Fed is keeping its benchmark interest rate steady, "at a range of 4.25% to 4.5%," waiting for the dust to settle before making any policy adjustments.