Fed Holds Rates Steady as Powell Warns of Tariff-Driven Inflation

The Federal Open Market Committee "decided to leave our policy rate unchanged," Powell told reporters on Wednesday (local time). The Fed kept the target range for the federal funds rate at 3.5 per cent to 3.75 per cent.

Powell said the economy "expanded at a solid pace last year" and is starting 2026 "on a firm footing." He said consumer spending has been "resilient." He said business investment has continued to grow. However, he said that housing "has remained weak."

Powell also pointed to the recent federal government shutdown. He said it "likely weighed on economic activity last quarter." He said those effects "should be reversed as the reopening boosts growth this quarter."

On jobs, Powell said conditions "may be stabilising after a period of gradual softening." He said the unemployment rate was 4.4 per cent in December and has "changed little in recent months."

But, he said, job growth has been weak. "Total nonfarm payrolls declined at an average pace of 22,000 per month over the last three months," he said. Excluding government jobs, he said private payrolls rose by an average of 29,000 per month.

Powell said slower job growth is tied in part to labour supply. "A good part of the slowing ... reflects a decline in the growth of the labour force due to lower immigration and labour force participation," he said. He added that "labour demand has clearly softened as well."

Powell said inflation has cooled from 2022. But he said it remains above the Fed's goal. He cited estimates showing total PCE prices rose 2.9 per cent over the 12 months ending in December. He said core PCE rose 3.0 per cent over the same period.

"These elevated readings largely reflect inflation in the goods sector, which has been boosted by the effects of tariffs," Powell said. He said services show more progress. "Disinflation appears to be continuing in the services sector," he said.

Asked whether tariff effects have already moved through the economy, Powell said, "A lot of it has." He said tariffs are "likely to move through and be a one-time price increase."

He said the Fed expects the tariff effects to peak and then fade. "The expectation is that we will see the effects of... tariffs flowing through goods prices peaking and then starting to come down," he said, "assuming there are no new major tariff increases."

Powell said the Fed is not setting a timetable for the next move. "Monetary policy is not on a preset course," he said. He said the Fed will decide "on a meeting-by-meeting basis."

He said the Fed could ease again if inflation cools and the job market weakens. "A weakening labour market would be an argument for loosening," he said. He also said the Fed would watch inflation at the same time.

Asked about rate hikes, Powell said: "We don't take things off the table." But he said it is not the main expectation. "It isn't anybody's base case right now ... that the next move will be a rate hike," he said.

Powell also warned about US deficits and mentioned the federal budget deficit is "uncontroversially on an unsustainable path." He said, "The sooner we work on it, the better."

On central bank independence, Powell defended the Fed's separation from elected officials. He said it is a standard practice in major democracies. He warned credibility would be hard to rebuild if the public doubts the Fed's motives.

"If you lose that, it's going to be hard to retain it," he said, adding, "I'm strongly committed to that, and so are my colleagues."

- IANS