\n<\/p>\n
President Trump\u2019s global trade war has significantly raised the bar for the Federal Reserve to lower interest rates, as tariffs risk worsening an already knotty inflation problem while also damaging growth.<\/p>\n
Jerome H. Powell, the Fed chair, drove home that message<\/a> in a hotly anticipated speech that came at the end of a turbulent week as financial markets melted down after Mr. Trump\u2019s tariff plans were revealed.<\/p>\n The measures would lead to higher inflation and slower growth than initially expected, Mr. Powell warned during an event in Arlington, Va., on Friday. He showed concern about the souring economic outlook, but his emphasis on the potential inflationary effect of the new tariffs made clear that it was a significant source of angst.<\/p>\n \u201cOur obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem,\u201d Mr. Powell said. The Fed\u2019s mandate includes two goals, fostering a healthy labor market and maintaining low, stable inflation.<\/p>\n Before Mr. Trump\u2019s return to the White House, inflation was already proving to be stubbornly sticky<\/a>, staying well above the Fed\u2019s 2 percent target. Yet the economy had stayed remarkably resilient, leading the central bank to adopt a more gradual approach to interest rate cuts that culminated in it pausing reductions in January. At that policy meeting, Mr. Powell established<\/a> that the Fed would need to see \u201creal progress on inflation or, alternatively, some weakness in the labor market\u201d to restart cuts.<\/p>\n But with inflation set to soar because of tariffs, it will take tangible evidence that the economy is weakening significantly to get the central bank going again. That could mean that rate cuts are pushed off until much later this year or even delayed until next year if that deterioration takes time to materialize.<\/p>\n \u201cThey will not be inclined to be pre-emptive to cut rates to avoid what may be a downturn,\u201d said Richard Clarida, a former vice chair at the Fed who is now a global economic adviser at Pimco, an investment firm. \u201cThey\u2019re actually going to have to see an actual crack in the labor market.\u201d<\/p>\n Mr. Clarida said he would look for a \u201cmaterial\u201d rise in the unemployment rate or a \u201cvery sharp slowdown, if not a contraction\u201d in monthly jobs growth to account for what he expected would be a significant lurch higher in inflation.<\/p>\n The latest jobs report, which was released Friday, showed that on the eve of Mr. Trump\u2019s latest tariff blitz, the labor market was far from cracking<\/a>. Employers added 228,000 jobs in March, and the unemployment rate ticked up to 4.2 percent as participation in the labor market rose.<\/p>\n Any enthusiasm about the latest data was quickly overtaken by a torrent of worries<\/a> about the economic outlook \u2014 concerns Mr. Trump\u2019s top economic advisers sought to address on Sunday.<\/p>\n Kevin Hassett, director of the White House National Economic Council, acknowledged that the president\u2019s approach could exacerbate inflation. \u201cThere might be some increase in prices,\u201d he said on ABC\u2019s \u201cThis Week.\u201d But he insisted that Mr. Trump\u2019s plan would ultimately reverse a long-running trend of importing lower-cost products in exchange for job losses.<\/p>\n \u201cWe got the cheap goods at the grocery store, but then we had fewer jobs,\u201d he said.<\/p>\n Scott Bessent, the Treasury secretary, also sought to downplay the prospects of a recession, telling NBC\u2019s \u201cMeet the Press\u201d on Sunday that there would be an \u201cadjustment process.\u201d<\/p>\n Economists across Wall Street are much more gloomy about the outlook. Many have sharply raised their recession odds alongside their forecasts for inflation. Those economists fear that Mr. Trump\u2019s tariffs, which are a tax on imports, will eventually decimate consumer spending, squeeze businesses\u2019 profit margins and potentially lead to layoffs that push the unemployment rate above 5 percent.<\/p>\n Many in this cohort expect the Fed to lower interest rates swiftly as a result, beginning as early as June. Federal funds futures markets reflect an even more aggressive response, with five quarter-point cuts priced in for this year.<\/p>\n Michael Feroli, chief U.S. economist at J.P. Morgan, is calling for a recession in the second half of this year, with growth declining 1 percent in the third quarter and another 0.5 percent in the fourth quarter. Over the course of the year, he expects growth to fall 0.3 percent and the unemployment rate to rise to 5.3 percent. Even as the Fed\u2019s preferred inflation gauge \u2014 once volatile food and energy prices are stripped out \u2014 surges to 4.4 percent, Mr. Feroli forecasts that the Fed will restart cuts in June and then lower borrowing costs at every meeting through January until the policy rate reaches 3 percent.<\/p>\n Jonathan Pingle, chief U.S. economist at UBS, has penciled in a percentage point worth of cuts this year even as core inflation reaches 4.6 percent. He expects the unemployment rate to shoot higher this year before peaking at 5.3 percent in 2026. Economists at Goldman Sachs projected that the Fed would deliver three consecutive quarter-point cuts beginning in July.<\/p>\n But there are credible risks to this outlook. The prevailing one is that the inflation shock will be just too enormous for the Fed to look past it by the summer, especially if the economy has not yet deteriorated in a meaningful way.<\/p>\n \u201cThe burden of proof now is higher because of the inflation situation that we\u2019re in,\u201d said Seth Carpenter, a former Fed economist who is now at Morgan Stanley. \u201cThey have to get enough information that convinces them that the negative effects of slowing \u2014 and possibly negative \u2014 growth outweighs the cost to them of inflation.\u201d<\/p>\n Mr. Carpenter said he expected no cuts from the Fed this year but multiple next year, bringing interest rates down to between 2.5 percent to 2.75 percent. Economists at LHMeyer, a research firm, have also shelved cuts this year, assuming there is no \u201cfull-blown\u201d recession.<\/p>\n Perhaps the most important determinant of when the central bank will restart rate cuts is what happens with inflation expectations. Beyond a year ahead, expectations have stayed somewhat stable, aside from some survey-based measures that are seen as less reliable than others.<\/p>\n If those expectations begin to wobble in a more notable way, the Fed would become even more hesitant to cut and would need to see even more economic weakness than usual, said William English, a Yale professor and a former director of the Fed\u2019s division of monetary affairs.<\/p>\n Eric Winograd, an economist at the investment firm AllianceBernstein, said Mr. Powell\u2019s inflation-focused posture on Friday would help to avoid that outcome. \u201cThe name of the game is: You talk tough,\u201d he said. \u201cYou keep inflation expectations where they are, and, by doing that, you preserve your ability to ease later if it\u2019s necessary.\u201d<\/p>\n A higher bar for interest rate cuts could put the Fed in a tougher spot with the Trump administration, Mr. English said. Up until last week, the president had been more subdued in his criticism of the central bank, compared with his first term. He had called for lower interest rates but sought to justify them by pointing to his plans to lower energy prices, among other reasons.<\/p>\n But as the rout in financial markets has intensified, Mr. Trump has turned his ire<\/a> back toward Mr. Powell and the Fed. On Monday, Mr. Trump said the \u201cslow moving\u201d<\/a> Fed should cut rates. At one point, the president appeared to suggest that the market rout was part of his strategy. He circulated a video<\/a> from a user on Mr. Trump\u2019s social media network that suggested the president was \u201cpurposely CRASHING\u201d the markets in part to force the Fed to lower interest rates.<\/p>\n Pressed on the matter on Sunday, Mr. Hassett of the National Economic Council responded by saying that the Fed was independent, before adding: \u201cHe\u2019s not trying to tank the market.\u201d<\/p>\n