Federal Reserve Chair Jerome Powell addressed the Economic Club of Chicago today, providing insight into the U.S. central bank’s response to the ongoing U.S.-China trade war.
Powell’s remarks suggest a cautious and data-driven stance from the Fed, disappointing investors who were hoping for more decisive monetary support amid growing economic uncertainty.
Trump’s Trade War: Tariff Escalation Paused – For Now
President Donald Trump initiated the trade war with steep import tariffs on a wide range of goods, aiming to pressure trading partners and bring manufacturing jobs back to the U.S. In retaliation, China imposed its own tariffs, prompting the U.S. to raise the stakes even further. However, following a sharp rise in 10-year Treasury yields, Trump has announced a temporary pause in additional tariffs — a move likely aimed at calming markets.
While the pause offers some relief, the already-imposed tariffs are expected to have significant inflationary effects on the U.S. economy, as Powell highlighted in his speech.
Powell: “Tariffs Will Fuel Inflation, But It’s Too Soon to React”
Powell acknowledged that higher import tariffs will likely be passed on to consumers, pushing up prices and contributing to headline inflation. However, he emphasized that the Fed will not react prematurely:
“The announced tariffs are much higher than expected, and we should expect their economic impact to be similarly significant. It will be a challenge for us to balance our dual mandate — keeping inflation in check while supporting economic growth.”
Powell also warned that the trade war could undermine international trade relations and erode global confidence in the U.S. dollar as the world’s reserve currency. Protectionist policies may also disrupt supply chains and reduce long-term investment, posing risks to global financial stability.
Markets Disappointed by Fed’s Cautious Tone
Both equity and crypto markets reacted negatively to Powell’s remarks, as investors had been pricing in aggressive interest rate cuts to offset the economic drag from the trade war. The Fed’s wait-and-see approach raises concerns that monetary policy might lag behind economic deterioration, especially if tariffs lead to a more severe slowdown than currently anticipated.
Markets fear that the Fed’s caution could allow a recession to take hold before sufficient stimulus is delivered. The lack of a clear commitment to rate cuts was seen as a missed opportunity to reassure jittery investors.
Consumer Confidence Hit Hard by Policy Uncertainty
While key economic indicators — such as GDP growth and unemployment — remain stable for now, consumer sentiment has taken a noticeable hit. The University of Michigan’s Consumer Sentiment Index dropped to 50.8 this month, marking the second-lowest level recorded since the index began in 1952.
The sharp decline reflects growing public anxiety about trade tensions, political unpredictability, and rising prices. Such a steep fall in sentiment is often a leading indicator of slowing consumer spending, which could further weigh on economic momentum in the months ahead.
Conclusion: Fed Stays Cautious, But Risks Are Mounting
The Federal Reserve finds itself in a precarious position. On one hand, it must guard against rising inflation driven by tariffs. On the other, it faces mounting pressure to stimulate an economy that may be heading for turbulence.
Powell’s remarks underline the delicate balancing act central bankers must perform in an era of geopolitical uncertainty and policy-driven shocks. Whether the Fed will be able to act swiftly enough in the face of deteriorating economic conditions remains one of the most pressing questions for global markets in the months to come.
