The United States is undergoing profound policy changes that place the Federal Reserve in uncharted territory, says Federal Reserve Chair Jerome Powell.
Powell spoke at the Economic Club of Chicago on April 16, telling the audience that the Trump administration is engaging in “very fundamental policy changes.”
“There isn’t a modern experience for how to think about this,” Powell said.
Here are key takeaways from Powell’s prepared remarks and question-and-answer session.
Challenges for the Dual Mandate
President Donald Trump’s tariff increases have been more significant than expected, and the persistent uncertainty surrounding levies could result in prolonged economic consequences.
While Powell anticipates higher inflation and lower growth, it is unknown how the U.S. central bank will craft monetary policy.
“We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension,” Powell said in a speech. “If that were to occur, we would consider how far the economy is from each goal, and the potentially different time horizons over which those respective gaps would be anticipated to close.”
The Federal Reserve maintains a dual mandate of price stability and full employment. Some economic observers have said the White House’s tariff agenda could threaten both objectives.
Officials have expressed concern that cutting interest rates in response to a tariff-driven slowdown could keep inflation elevated. At the same time, keeping inflation-fighting policy restraint intact could leave the U.S. labor market and the broader economy vulnerable to possible adverse effects from higher import duties.
Powell said the Federal Reserve’s job now is to ensure that a temporary jump in inflation from tariffs does not become more persistent.
“The inflationary effects could also be more persistent,” the Fed chief stated. “Avoiding that outcome will depend on the size of the effects, on how long it takes for them to pass through fully to prices, and, ultimately, on keeping longer-term inflation expectations well anchored.”
As for the broader economy, released data suggest growth has slowed in the first quarter compared to a year ago, the central bank head noted.
The Federal Reserve Bank of Atlanta’s GDPNow Model estimate suggests a negative 0.1 percent growth rate after adjusting for the spike in imports—companies have accelerated their purchases from abroad ahead of the president’s tariffs.
Still, despite these challenges, Powell reiterated that monetary policy is well-positioned to wait for greater clarity and respond to various scenarios.
While he refrained from hinting at the following action, the futures market is pencilling in a quarter-point interest rate cut at the June policy meeting.
No Intervention Coming
U.S. financial markets have been incredibly volatile over the last several weeks, and the selloff continued during Powell’s remarks.
Wall Street should not bet on the Federal Reserve intervening anytime soon.
Powell shrugged off suggestions that the U.S. central bank could step in to stop the bleeding or stabilize market conditions.
“I’m gonna say no with an explanation,” Powell said. “What I think is going on in markets is that markets are processing what’s going on.”
Uncertainty regarding policy changes is fueling the volatility, and the economic effects will remain undetermined even when the policies are more specific. However, while Wall Street has wiped out trillions of dollars over the past month, Powell says the “markets are functioning” well under challenging circumstances.
“Markets are doing what they’re supposed to,” he said. “They’re functioning just as you would expect them to.”
The blue-chip Dow Jones Industrial Average lost more than 900 points after Powell’s appearance, adding to its year-to-date decline of 7 percent.
The tech-heavy Nasdaq Composite Index plummeted about 700 points, lifting this year’s loss to above 16 percent. The broader S&P 500 Index erased close to 4 percent and is down approximately 11 percent this year.
The U.S. Treasury market has also experienced turbulence this month, with long-term yields going through an erratic period.
Market watchers have been confounded by the increase in yields, particularly as auction data signal solid domestic and foreign demand.
Powell says it is challenging to determine causes in real time.
“I’ve had a lot of experience with significant moves, for example, in the bond market, where there’s a narrative that people land on, and then two months later, you look back and go, ‘That was completely wrong,’” Powell stated.
“So I think it’s very premature to say exactly what’s going on.”
Yields in the U.S. government bond market were mostly negative, with the benchmark 10-year yield falling below 4.3 percent.
Labor Market Is Stable
According to the Fed chair, the employment situation remains stable despite consternation in the U.S. labor market.
Although job growth has slowed from a year ago, lower labor-force growth and minimal layoffs have kept the unemployment rate at around 4 percent.
“Overall, the labor market appears to be in solid condition and broadly in balance and is not a significant source of inflationary pressures,” Powell said.
Analysts have been concerned that lower immigration levels could reverse the U.S. job market. However, according to Powell, possible adjustments in immigration volumes might not matter much because “the effects on demand and supply will more or less cancel each other out.”
Another worry among market watchers has been the Department of Government Efficiency-related actions.
Recent data from global outplacement firm Challenger, Gray & Christmas reported that government layoffs spiked by more than 216,000 in March. In the first three months of 2025, announced public-sector job cuts have totaled nearly 280,000.
It would have been a muted month for layoffs if it were not for planned government headcount reductions.
Powell noted that should federal layoffs intensify, the impact on the broader labor market might not be significant enough.
Supplying the World With Dollars
Powell said that the Federal Reserve is ready to supply the world with U.S. dollars.
In the past, the global economy has suffered dollar shortages, forcing the central bank to inject the world with dollars.
“We want to make sure that dollars are available,” Powell said.
The Fed maintains standing dollar swap-line agreements with central banks worldwide. This standard monetary operation among central banks ensures economic stability and liquidity in financial markets. As observed during the economic crisis at the onset of the coronavirus pandemic, dollar-funding markets can be sensitive throughout market turmoil.
Powell touted the program as beneficial to the United States because foreign institutions purchase an asset-backed security backed by loans to U.S. consumers, helping lower borrowing costs.
“We lend to the central bank in dollars, and they pay us back in dollars—then they pay in their currency,” Powell said. “They lend in dollars, and so we take no credit risk, and it supports dollar-funding markets.”
With the U.S. dollar slumping and Treasury yields staying elevated, there has been a concern that the world could be shifting away from the world’s largest economy.
Minneapolis Fed Bank President Neel Kashkari stated that the greenback should strengthen and bond yields should fall in a tariff-driven, volatile economic climate.
“Normally, when you see big tariff increases, I would have expected the dollar to go up. The fact that the dollar is going down at the same time, I think, lends some more credibility to the story of investor preferences shifting,” Kashkari said last week during an interview with CNBC’s “Squawk Box.”
From The Epoch Times
