Key Takeaways
In an economy where everything is suddenly uncertain, the Federal Reserve is waiting to see how things shake out before making any big moves.
Federal Reserve Chair Jerome Powell emphasized the central bank's cautious attitude Friday in an appearance at the University of Chicago. He said the Fed was waiting to see how President Donald Trump's sweeping new economic policies panned out before adjusting monetary policy in response.
"The costs of being cautious are very, very low," Powell said. "The economy's fine. It doesn't need us to do anything, really. And so we can wait, and we should wait."
In recent weeks,
mass layoffs of federal workers
and
erratic threats of tariffs
have roiled financial markets and
stoked uncertainty
for businesspeople and consumers. It has also prompted speculation about whether the Federal Reserve would be forced to lower borrowing costs to boost the economy and prevent a severe increase in unemployment.
Powell's comments threw some cold water on rate cut expectations. Friday afternoon, financial markets were pricing in just a 3% chance the Federal Reserve's policy committee would lower the fed funds rate when it next meets in March, down from 12% the day before, according to the CME Group's FedWatch tool, which forecasts rate movements based on fed funds futures trading data.
The Fed's Dual Mandate Could Cause Double Bind
Brewing economic upheavals could put the Fed in a double bind.
The central bank's job is to keep inflation low and employment high. To push down the post-pandemic burst of inflation, the Fed has held its influential
federal funds rate
high enough to throw sand in the gears of the economy, pushing up borrowing costs on all kinds of loans to discourage borrowing and spending. Inflation has fallen since its peak in 2022 but is still running higher than the Fed's 2% annual goal. So far, the job market
has stayed resilient
, with unemployment remaining low despite the drag of high interest rates.
However, economists fear tariffs could
push up the cost of living
and accelerate inflation; at the same time, they reduce economic growth, hurting the job market. In that case, financial markets are betting the Fed will have to abandon its inflation fight and lower interest rates to prevent an economic downturn.
Powell said the Fed was keeping a close eye on how Trump's trade wars and campaign of mass deportation will affect the economy. Another major unknown is the federal budget: Trump and Republican lawmakers are working on a budget that's likely to include large tax breaks, an ambitious goal to reduce federal spending, and a high likelihood of
accelerating spending deficits
.
"Uncertainty around the changes and their likely effects remains high," Powell said. "As we parse the incoming information, we are focused on separating the signal from the noise. As the outlook evolves, we do not need to be in a hurry, and we are well positioned to wait for great clarity."
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