Powell Flags Sharp Tariff Shock, Elevated Uncertainty: Fed Sticks To 'Wait-And-See' Mode

Federal Reserve Chair Jerome Powell warned Wednesday that the step increases in tariffs announced by President Donald Trump last month has introduced “a great deal of uncertainty” into the U.S. economic outlook.

Addressing reporters after the May Federal Open Market Committee meeting, the Fed Chair hinted that the central bank is increasingly concerned about rising risks to both of its congressional mandates: maximum employment and stable prices.

“The tariff increases announced so far have been significantly larger than anticipated,” Powell said.

He noted that if the tariffs are sustained, they could lead to higher inflation, weaker growth, and a rise in unemployment—directly undermining the Fed's dual mandate.

This Is Not 2019

Powell underscored that monetary policy is now in a "good place" to remain on hold as the Fed awaits further clarity on how recent developments—including aggressive trade policy shifts—will affect the economy.

“We don't think we need to be in a hurry. We are going to be watching the data. It may move quickly or slowly. But we're well positioned to wait,” he said.

“We are in a good place to wait and see,” he added.

This marks a shift from past Fed playbooks to tariffs, notably during the 2019 trade war, when the Fed moved preemptively to cut rates amid tariff shocks and weaker inflation.

“During the prior trade war of 2019 we did cut three times. We had a weakening economy and inflation at 1.6%.”

Yet, Powell made it clear that this is not 2019. Inflation has now run above the Fed's 2% target for four consecutive years, limiting the central bank's flexibility to respond aggressively to weakening economic conditions without risking price instability.

Twin Risks: Inflation and Unemployment Both Creep Higher

Adding new language to its policy statement, the FOMC acknowledged that “risks of higher unemployment and higher inflation have risen,” a rare dual warning that reflects the unpredictable outcomes of supply-side shocks like tariffs.

Powell indicated that the economy could enter a situation where the Fed's two goals are "in tension," stating: "We'd have to look at how far each variable is from its goal and make a difficult judgment."

While Powell declined to publish an official recession probability, he admitted that downside risks have increased, though they are not yet visible in the current data.

"We don't see [the risks] materializing in the data yet, but that could change," he said.

Powell Dodged Questions On Trump

Although Powell avoided direct confrontation with Trump, who has vocally demanded lower rates and signaled he would not reappoint Powell if reelected, he reiterated the Fed's independence.

Asked about any meetings with the president, Powell replied: "I have never asked for a meeting with any president and I never will."

Asking whether potential tax cuts could further jeopardize U.S. fiscal sustainability, Powell replied: “I think they don’t need my advice and our advice on how to do fiscal policy. Any more than we need their advice on monetary policy.”

Market Reactions

Market expectations for a June rate cut dipped to 23% following the Fed Chair’s press conference, down from 28% earlier in the session.

Traders now assign a 72% probability to a 25-basis-point decrease in July, with a rate reduction nearly fully priced in by September, as per the CME FedWatch tool.

The S&P 500 reversed earlier losses after a major post-Powell development: reports surfaced that Trump plans to rescind global chip export restrictions amid a broader debate on AI-related curbs.

Officials are reportedly preparing to roll back the AI diffusion rule introduced during the Biden administration.

Nvidia Corp. NVDA surged 2.4% to $116 on the news, helping lift the broader market. The S&P 500 rose 0.5%, finishing the day at 5,629 points.

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