Powell: "Tariff-Induced Inflation Impact Temporary"... Maintains Outlook for Two Rate Cuts This Year

Powell: "Low Risk of Recession, Strong Economy"
Fed Holds Benchmark Rate at 4.25-4.5% per Year
Growth Outlook Lowered, Inflation Forecast Raised for This Year
Despite 'S Fear,' Dovish Powell Lifts Stock Market

"Tariffs are expected to have a temporary impact on inflation. The economy is strong, the risk of recession is not high, and we are in a good position to either cut or maintain interest rates."

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Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), stated on the 19th (local time) that the inflationary impact of tariffs is expected to be temporary. Despite market concerns about a recession, he confirmed the Fed's intention to maintain a cautious monetary policy stance for some time, given the economy's continued strength. As the Fed held the benchmark interest rate steady as expected and maintained its forecast of two rate cuts this year, Powell’s more dovish-than-expected remarks led to a broad rise in the New York stock market.

At a press conference following the Federal Open Market Committee (FOMC) regular meeting that day, Chairman Powell said that the idea of inflation caused by tariffs being transitory is "our baseline scenario." He explained, "If inflation is transitory and can quickly fade without our intervention, it may be appropriate to just wait and see," adding, "The same could apply to tariff-related inflation." This suggests that price increases due to tariff policies are expected to be one-off and the shock limited.

He also hinted at the possibility that President Donald Trump's tariff policies could affect inflation and the U.S. economy. Powell said, "Inflation has partly started to rise in response to tariffs, and further progress may be delayed throughout this year," adding, "(The economy) is generally robust, but household and business surveys show increased uncertainty and significant concerns about downside risks."

However, he dismissed recession fears by stating that the "economy is strong." Powell assessed that while recession risks have risen, they are not high, and that the current situation is not stagflation. He added, "Our policy is well-positioned to respond to upcoming developments."

The Fed maintained the federal funds rate at 4.25?4.5% that day, marking the second consecutive hold since January. While raising its inflation forecast and lowering its growth outlook for the year, the Fed kept its projection of two rate cuts this year unchanged. This means two cuts of 0.25 percentage points each, totaling 0.5 percentage points. Regarding this, Powell explained, "With growth slowing and inflation forecasts rising, we maintained the outlook for two rate cuts through the December meeting." The median year-end rate projections for 2026 and 2027 were also unchanged at 3.4% and 3.1%, respectively.

In the Summary of Economic Projections (SEP) released that day, the Fed revised its U.S. GDP growth forecast for this year from 2.1% to 1.7%, and the year-end unemployment rate forecast from 4.3% to 4.4%. The inflation rate, based on the Fed’s preferred core Personal Consumption Expenditures (PCE) price index, was raised from 2.5% to 2.8%. Amid growing market fears of entrenched high inflation and economic slowdown due to the Trump administration’s second-term tariff policies, the Fed’s outlook can be seen as partially reflecting concerns about stagflation.

Additionally, the Fed decided to slow the pace of quantitative tightening. Currently, the Fed is conducting quantitative tightening by not reinvesting up to $25 billion of maturing Treasury securities monthly, but starting next month, it will reduce the monthly cap on Treasury quantitative tightening to $5 billion.

As the Fed held the benchmark interest rate steady as expected and maintained its forecast of two rate cuts this year, investors were relieved, and the New York stock market rose broadly. On that day, the Dow Jones Industrial Average rose 0.92%, while the S&P 500 and Nasdaq indices climbed 1.08% and 1.41%, respectively. Treasury yields declined. The 10-year U.S. Treasury yield, a global bond yield benchmark, fell 3 basis points (1bp = 0.01 percentage points) from the previous trading day to 4.24%, and the 2-year Treasury yield, sensitive to monetary policy, dropped 6 basis points to around 3.97%.

However, some on Wall Street cautioned against lowering vigilance. Given that the Fed partially hinted at stagflation risks in its economic outlook and that mutual tariffs are scheduled to be imposed in the U.S. next month, Powell’s remarks were considered excessively dovish.

Whitney Watson, Chief Investment Officer (CIO) of Bonds and Liquidity Solutions at Goldman Sachs, diagnosed, "The FOMC members’ revised forecasts gave somewhat of a stagflationary feel as growth and inflation predictions moved in opposite directions."

There is also speculation that the April 2 mutual tariff imposition worldwide and the full reflection of tariff impacts on the economy could make the May FOMC meeting a critical turning point for monetary policy. Jim Curran, Chief Investment Officer (CIO) of the Portfolio Solutions Group at Morgan Stanley, said, "The importance of the April (mutual tariff) event cannot be overstated," and predicted, "The tone of the May 7 FOMC regular meeting will change (from Powell’s current message)."

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