Fed In The Crosshairs: Trump’s Tariff Gamble Puts Central Bank On Edge

 

President Donald Trump’s sweeping and aggressive tariff strategy has thrown the Federal Reserve into uncharted territory, Fed Chair Jerome Powell said Wednesday, warning that the scope and scale of these economic changes are unprecedented in the modern era.

“These are very fundamental policy changes,” Powell remarked during a speech at the Economic Club of Chicago. “There isn’t a modern experience for how to think about this.”

Powell emphasized that the level of tariff hikes announced so far is far greater than expected, and the long-term uncertainty they’ve introduced could leave lasting damage on the U.S. economy. As the Fed tries to manage the delicate balance between employment and inflation, the twin pressures created by Trump’s tariffs—slower growth and rising prices—pose a rare and difficult challenge.

“We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension,” he said, referring to the Fed’s obligation to pursue both maximum employment and stable prices.

Markets responded immediately. As Powell spoke, the Dow dropped by over 700 points. The S&P 500 and Nasdaq also slid sharply, reflecting investors' concerns that the central bank may be left with few good options in this environment.

While the broader economy remains relatively stable for now, economists widely believe it’s only a matter of time before the full impact of the tariffs hits. With reciprocal duties looming—briefly enacted in early April but delayed until July—many fear a resurgence of 1970s-style “stagflation,” where high unemployment and inflation coexist.

Trump’s tariff regime includes:

• 25% tariffs on steel and aluminum

• A 25% levy on non-compliant goods from Mexico and Canada

• A massive 145% duty on Chinese imports

• A 25% tariff on cars, with additional duties on auto parts pending

• A 10% blanket tariff on all imports

Temporary exemptions were issued for some electronics, and new tariffs on semiconductors, pharmaceuticals, copper, and timber are reportedly in the pipeline.

Some Fed officials have been unusually direct in their warnings. “It was a clear warning about stagflation, and a declaration that the Fed won’t enable the White House with rate cuts,” said one market strategist. In other words, the Fed is unlikely to intervene with looser monetary policy simply to offset the effects of a political trade agenda.

The last time the U.S. faced this kind of economic pressure was in the late 1970s and early 1980s. Under then-Chair Paul Volcker, the Fed hiked interest rates dramatically to combat inflation—even at the cost of significant economic pain. Whether Powell’s Fed would follow that playbook remains to be seen.

Chicago Fed President Austan Goolsbee recently described tariffs as a “negative supply shock”—the kind that worsens both inflation and unemployment. “There is not a generic playbook for how the central bank should respond to a stagflationary shock,” he noted.

Powell acknowledged that if stagflation materializes, the Fed will need to carefully weigh which part of its mandate—controlling inflation or supporting employment—requires more immediate attention, based on how far the economy deviates from each target and how quickly recovery is expected.

“We understand that elevated levels of unemployment or inflation can be damaging and painful for communities, families, and businesses,” Powell said.

Some Fed officials are also monitoring consumer sentiment closely. Recent surveys show deteriorating expectations for inflation, which could further complicate the Fed’s response. While inflation remains below the 40-year high seen in 2022, it still hovers above the Fed’s 2% target—reducing the urgency for any rate cuts in the near term.

For now, the prevailing consensus is caution. Cleveland Fed President Beth Hammack summed it up plainly during a speech in Ohio: “This is a difficult set of risks for monetary policy to navigate. Given the economy’s starting point, and with both sides of our mandate expected to be under pressure, there is a strong case to hold monetary policy steady.”

As Trump’s trade policy continues to reshape the global economic landscape, the Fed finds itself in a precarious position—caught between political decisions it doesn’t control and economic outcomes it must manage.