Fed’s Powell Warns of Rising Stagflation Risk From Trump Tariffs

Fed Chair Jerome Powell

Happy Wednesday! The conclave to elect a new pope began today at the Vatican, and the first round of voting resulted in black smoke from the Sistine Chapel chimney, indicating no pontiff was chosen. Here at home, a two-day conclave of Federal Reserve cardinals concluded with no change to interest rates - but some significant changes to their outlook for the economy. Read on for details.

Fed's Powell Warns of Rising Stagflation Risk From Trump Tariffs

The Federal Reserve on Wednesday held its benchmark interest rate steady but warned about the potential economic harm from President Donald Trump's trade war.

"If the large increases in tariffs that have been announced are sustained, they are likely to generate a rise in inflation, a slowdown in economic growth and an increase in unemployment," Federal Reserve Chairman Jerome Powell said at an afternoon news conference.

Rising uncertainty: In a statement issued at the conclusion of its latest meeting, the rate-setting Federal Open Market Committee said the economy is still in good shape, largely dismissing the recent report that showed the economy contracting slightly over the first three months of the year. The Fed panel said the economy continues to expand at a "solid pace" amid low unemployment and a sturdy labor market. At the same time, Fed officials said the "risks of higher unemployment and higher inflation have risen" and "uncertainty about the economic outlook has increased further" since the committee's last meeting in March.

The statement did not mention the primary driver of the rising risk and uncertainty - the dramatic tariff increases Trump imposed last month - but Powell issued his warning about the economic threat they pose in remarks to the press after the FOMC meeting.

A tough situation: Powell said Fed officials would wait and watch the data as they weigh the effects of the tariffs on both prices and employment. Although tariffs can be expected to raise prices and reduce employment, a combination known as stagflation, economic reports haven't shown much stress yet, Powell said, and there is always a chance that new trade deals could soften the potential damage. That means the Fed is prepared to be patient.

"We don't think we need to be in a hurry," Powell said, repeating a line he has used over the last few months as the central bank has continued to evaluate its effort to bring inflation back to its 2% target rate. "It's not a situation where we can be preemptive, because we actually don't know what the right response to the data will be until we see more data."

Still, economic conditions created by the tariffs may put the Fed in a tough spot in which its dual mandate to pursue price stability and maximum employment call for opposite policy actions: rate cuts to boost jobs and the economy, and rate hikes to combat inflation. "They're in a bad situation," William English, a former senior Fed adviser, told The Wall Street Journal. "If I were there, I would be suggesting that they stay put for now."

Ignoring political pressure: Asked by a reporter if President Trump's repeated calls for the central bank to lower interest rates, as well as personal criticism aimed at the Fed chief, made his job more difficult, Powell said it has had no effect.

"My whole focus is on and my colleague's focus is all on ... trying to navigate this tricky passage we're in right now, trying to make the right decisions," he said. "That's what we think about day and night and this is a challenging situation and that's 100% of our focus right now."

Powell also said Trump has not requested a meeting with him, and he would "never" request a meeting with Trump, since it's not part of the proper role of the Fed chair. "I don't think it's up to a Fed chair to seek a meeting with the president, although maybe some have done so," he said. "I've never done so, and I can't imagine myself doing that."

What analysts are saying: University of Michigan economist Justin Wolfers noted that the Fed didn't refer to stagflation by name, but that appears to be its main concern. "Never a good moment when your central bank says that it's worried about both higher unemployment and higher inflation," he wrote on social media. "That's a problem that monetary policy alone can't solve."

Many economists think that the Fed is unlikely to change its rate policy anytime soon, and probably not before September, but some worry that the central bank is waiting too long to respond to what appears to be a slowing economy. "The longer they're on hold, the more they're passively tightening," George Goncalves, head of U.S. macro strategy at Japanese banking giant MUFG, told the Journal. Cutting rates later in the summer in response to a tariff-driven slowdown is "just too long of a wait," he said. "You might lose that chance of really catching the economy."

The problem, as Powell highlighted today, is that the Fed can't be sure which way the stagflationary ball might bounce, so it's not yet clear whether lowering rates to ease a slowdown or raising them to head off inflation would make more sense. Torsten Slok, chief economist at the Apollo Group, told the Associated Press that he's worried about price hikes. "The bottom line is that inflation will be rising significantly over the next six months," he said.

Quote of the Day

"No."

  • President Donald Trump after being asked by a reporter Wednesday if he would consider dialing back his 145% tariff on Chinese goods to draw China to the negotiating table. The comment comes after Treasury Secretary Scott Bessent said in an interview on Fox News Tuesday evening that the tariffs on China aren't sustainable but declined to say whether the president might lower his tariffs on Chinese goods to, say, 50%. "I'm not going to give away our strategy," he said. "Look, everything's on the table. It's up to the president."

Bessent and Chinese officials are scheduled to hold trade talks this weekend in Switzerland. Bessent told Fox he expects the initial talks to focus on de-escalation of the trade war.

House Republicans Back Off Some Medicaid Cuts

As Republicans race to find hundreds of billions of dollars in spending cuts for their massive budget bill providing trillions in tax cuts, House Speaker Mike Johnson and party leaders have ruled out at least one controversial possible cut to Medicaid.

Johnson told reporters Tuesday evening that the GOP plan would not lower the share of Medicaid costs borne by the federal government for people enrolled in the program under the Affordable Care Act's expansion. The Federal Medical Assistance Percentage, or FMAP, rate for that group is 90%, and there had been talk of reducing that rate to match the lower rates applied to other Medicaid enrollees.

The speaker reportedly also downplayed the possibility of imposing per capita caps on Medicaid funding for the expansion population. "I think we're ruling that out as well, but stay tuned," he told reporters.

Johnson said work requirements for healthy adults remained part of the GOP plan, but that alone won't generate the savings Republicans are targeting. The House Energy and Commerce Committee, which oversees Medicaid, has been tasked with finding $880 billion in 10-year savings as part of Republicans' budget reconciliation bill.

Johnson's comments came after he met with GOP moderates who raised concerns about potential cuts to Medicaid. As Republicans race to settle on a plan to pay for their party-line bill enacting President Donald Trump's tax and spending cuts, Medicaid has been a central focus, but some in the party have pushed back against deep cuts that would affect their constituents and give Democrats a juicy political line of attack. House Democrats on Tuesday introduced a discharge petition that would force a vote on a resolution to block cuts to enrollment or benefits in Medicaid or the Supplemental Nutrition Assistance Program.

**CBO projects millions would lose coverage: **The nonpartisan Congressional Budget Office said Wednesday that millions of Americans would lose Medicaid coverage as a result of changes like those that had been on the Republican menu of options.

The CBO analyzed the effects of five different options for reducing Medicaid spending:

  • cutting the federal matching rate for enrollees who became eligible for the program under the Affordable Care Act - the idea that Johnson ruled out;
  • limiting state taxes on healthcare providers. States use these taxes to essentially game the Medicaid system and get more money from the federal government;
  • establishing per capita caps on Medicaid spending - the other idea Johnson said was in doubt;
  • or establishing per capita caps on just those Medicaid enrollees who became eligible under the Affordable Care Act's expansion;
  • repealing new rules that streamlined certain Medicare and Medicaid applications and renewals.

The nonpartisan budget office estimated that the possible changes would each cut the federal deficit, with savings ranging from $162 billion for option 5 above to $710 billion for option 1. But the changes would also all reduce Medicaid enrollment, with the coverage losses ranging from 2.3 million for option 5 above to 8.6 million for option 2.

The CBO estimates were requested by Sen. Ron Wyden and Rep. Frank Pallone, the top Democrats on the Senate Finance Committee and House Energy and Commerce Committee.

"This non-partisan Congressional Budget Office analysis confirms what we've been saying all along: Republicans' Medicaid proposals result in millions of people losing their health care," Pallone said in a statement. "It's time for Republicans to stop lying to the American people about what they're plotting behind closed doors in order to give giant tax breaks to billionaires and big corporations."

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