Federal Reserve Chair Jerome Powell is set to address an economic conference in New York on Friday, delivering remarks that could provide critical insights into the central bank’s policy direction. As the Federal Reserve attempts to navigate toward a soft landing from inflation, Powell faces mounting risks, including a potential resurgence of price pressures due to escalating global trade tensions and shifting public inflation expectations.
The Impact of Trade Policies and Economic Shifts
Powell’s speech comes at a pivotal time, just before the Federal Reserve enters its communication blackout period ahead of its March 18-19 policy meeting. The economic landscape is being reshaped by several factors, including President Donald Trump’s aggressive tariff policies targeting major U.S. trade partners such as Canada, Mexico, and China. Additionally, the administration’s push to shrink federal government operations and reduce spending adds further uncertainty to the economic outlook.
Although these policy shifts have yet to be fully reflected in economic data, daily fluctuations in stock, bond, and currency markets signal potential instability. The specter of “stagflation”—a combination of stagnant economic growth and persistent inflation—has reemerged as a topic of concern among forecasters. Some Federal Reserve policymakers have warned that the central bank may soon face difficult decisions between prioritizing inflation control and sustaining economic growth through potential interest rate cuts.
Tariffs and Inflation Risks
Initially, the Federal Reserve downplayed the inflationary effects of tariffs, viewing them as short-term disruptions. However, the broad scope of Trump’s new and proposed import taxes raises the likelihood that businesses and households will adjust their behavior in ways that amplify inflationary pressures. Retaliatory measures from trading partners further complicate the situation, making it increasingly difficult for the Fed to maintain its earlier stance.
Adam Posen, president of the Peterson Institute for International Economics, emphasized that while the Federal Reserve does not set trade or tax policy, it must acknowledge the likely inflationary consequences of tariffs. “The Fed’s not here to set trade policy or tax policy. The government can do whatever it wants,” Posen said. “But at this point, the Fed should be much more explicitly stating, based on all available mainstream evidence, that it is more likely than not the tariffs will be inflationary.”
Powell is scheduled to speak at 12:30 p.m. EST (1730 GMT) at the University of Chicago’s Booth School of Business annual monetary policy forum.
Employment Data and Market Sentiment
Adding to the complexity of Powell’s message, the U.S. employment report for February will be released just hours before his speech. This report will provide a snapshot of whether the economy remains in a “sweet spot” of low unemployment and declining inflation or if weaknesses are beginning to emerge.
Recent data indicate growing uncertainties. A report from Challenger, Gray & Christmas revealed the highest number of announced job cuts in nearly five years, with federal government layoffs leading the trend. Meanwhile, new unemployment claims by former federal workers surged to a four-year high, raising concerns about broader impacts on government contractors and related industries.
Market Reactions and Inflation Expectations
Financial markets have exhibited sharp reactions to recent economic developments. Stock markets, which reached record highs in February, have since experienced notable declines following Trump’s tariff announcements. Consumer spending fell unexpectedly in January, and major U.S. retailers have issued warnings about a challenging 2025 outlook.
Inflation expectations, a key metric monitored by the Federal Reserve, have shown mixed signals. Some consumer surveys indicate rising expectations, while market-based measures such as Treasury Inflation-Protected Securities have declined, reflecting investor concerns about slowing economic growth.
Investors currently anticipate an economic slowdown that could mitigate tariff-induced price increases, keeping inflation in check and prompting the Fed to implement three quarter-percentage-point rate cuts this year—more than the two projected by policymakers in December. However, the evolving economic conditions could make these projections uncertain.
The Fed’s Dilemma: Balancing Inflation and Economic Stability
Should Trump’s tariffs take full effect, their impact on prices may take months to become fully apparent. The Federal Reserve is likely to adopt a cautious approach, refraining from policy shifts until inflation expectations remain stable. However, if public inflation expectations begin rising significantly, policymakers may be forced to act decisively.
Historical references to former Fed Chair Paul Volcker’s aggressive inflation-fighting policies of the early 1980s have resurfaced in recent discussions. This signals that, should inflation rekindle, the Fed may prioritize controlling price pressures over maintaining employment levels.
Tani Fukui, senior director of global economic and market strategy at MetLife Investment Management, highlighted the importance of Powell’s perspective on inflation expectations. “Until now, I’ve been pretty sanguine about it in terms of, oh, it’s consumers. Consumers look at egg prices and they get mad,” Fukui said. “But with recent survey and anecdotes pointing to price increases in the pipeline, and the drumbeat of news about Trump’s tariff plans, I’d like to get a better understanding of where his head is.”
As Powell takes the stage, markets and policymakers alike will be closely analyzing his remarks for any indications of how the Fed plans to navigate this intricate economic landscape.