WASHINGTON — Federal Reserve Chair Jerome Powell said the central bank is still trying to get a handle on how higher tariffs will impact the economy.
Powell said it was always going to take time for higher import levies to translate into higher prices for consumers, but the administration's process of engaging in bilateral trade negotiations with multiple countries at the same time is making the process take longer than he expected.
Even after major trade deals have been struck with the European Union, Japan and the UK, he said the central bank still does not have a clear view on where the effective tariff rate will settle.
"We are clearly getting more and more information, and I think at this point people's estimates, our estimates, outside estimates of the likely effective level of tariffs is not moving around that much at this point," Powell said during his post Federal Open Market Committee press conference. "At the same time, there are many, many uncertainties left to resolve. So I guess we are learning more and more. Doesn't feel like we're very close to the end of that process."
Powell's comments come just two days ahead of the deadline for countries to negotiate trade deals with the U.S. to avoid being subject to the ultra-high rates that President Donald Trump first called for in April. For now, all countries are facing a minimum tariff of 10% on most goods, a rate that is roughly four times the effective tariff rate from last year.
Powell said the new tariffs are clearly having an effect on costs somewhere in the economy, noting that monthly tariff collections have jumped to around $30 billion, well above their pre-Trump levels. He noted that consumers have largely been spared those costs, but said it is not clear why.
"People situated upstream from the consumer are paying most of this for now, [increases] are starting to show up in consumer prices," Powell said. "We expect to see more of that, and we know from surveys that companies … have every intention of putting this through to the consumer, but the truth is, they may not be able to in many cases. We're just going to have to watch and learn empirically how much of this [reaches consumers] and over what period of time."
The lingering uncertainty about how tariffs and other policy reforms will impact the U.S. economy in the months ahead contributed to the FOMC's decision to keep interest rates unchanged this week.
Powell said most of the committee felt the current target range for the federal funds range is "modestly" restrictive and that such a stance is appropriate given continued high inflation readings and the risk of a tariff-induced price shock.
Powell also pledged to ensure that any uptick in pricing that comes from new tariff policies is short-lived.
"In the end … this will not turn out to be inflation, because we'll make sure that it's not," Powell said. "We will … make sure that this does not move from being a one-time price increase to serious inflation. We want to do that efficiently."
The FOMC's assessment of the economic outlook was not unanimous and neither was its policy decision. Fed Vice Chair for Supervision Michelle Bowman and Gov. Christopher Waller both voted against the move, favoring a quarter-point rate cut instead.
Powell declined to disclose the rationale for the dissenting votes, noting that Waller and Bowman will likely explain themselves in published statements or public remarks later this week. But he said both made clear, thoughtful arguments during the meeting.
He added the divergent opinions were to be expected given the unique situation in which the Fed finds itself, balancing risks to both inflation and employment. Ultimately, the majority decided that the labor market was strong enough to withstand current interest rates while the Fed waits for more clarity on the impact of tariffs.
"That's the nature of a supply shock. It's probably not surprising that there would be differences and different perspectives on that, as well as different views of where the neutral rate is and different views of how tight policy is," Powell said. "What you hope is that people explain their positions very thoughtfully and clearly, and we absolutely had that today, all the way around the table. I would call it one of the better meetings from that standpoint."
