Federal Reserve Chair Jerome Powell addressed the economic outlook before the Economic Club of Chicago. He stated the Fed is well-positioned to await further clarity before adjusting its policy stance, noting the US economy remains “solid” despite increased uncertainty and downside risks. The economy is operating at or near maximum employment, with inflation slightly above the 2% target, having significantly decreased.
Growth is projected to have decelerated in the first quarter of 2025 compared to the previous year. Strong import activity in the first quarter is expected to negatively impact GDP growth. Business and household sentiment have declined sharply, reflecting trade policy concerns and elevated uncertainty. The labor market is considered solid and broadly balanced, not contributing to inflationary pressures.
PCE prices are estimated to have increased by 2.3% over the 12 months ending in March, with core PCE estimated at 2.6%. The administration’s policies are still evolving, and their effects remain uncertain. Larger-than-anticipated tariffs are likely to result in higher inflation and slower economic growth. The inflationary effects of tariffs could be persistent, contingent on inflation expectations. The Fed’s primary responsibility is to maintain well-anchored long-term inflation expectations.
Powell acknowledged the potential for a challenging scenario where the dual-mandate goals come into conflict. Should this occur, the Fed would assess the economy’s proximity to each goal and the projected timelines for achieving them.
During the Q&A session, Powell indicated that current policy effects are likely to move the Fed away from its goals, potentially continuing throughout the year before a possible resumption next year. The Fed’s role is to ensure this effect is temporary. While the Fed’s dual goals are not currently in tension, the prevailing impulse points towards higher unemployment and inflation. A conflict in the Fed’s mandate would necessitate a difficult judgment. Elevated uncertainty may cause households and businesses to delay decisions. Structurally higher risks could diminish the attractiveness of the US economy.
Markets are processing policy changes in an orderly manner, functioning as expected, although continued volatility is anticipated. The Fed is not nearing a point where it would halt balance sheet runoff entirely. A slower pace of runoff would allow for a smaller balance sheet without causing disruptions. The Fed remains prepared to provide US dollar liquidity to global central banks if necessary.
