Author: Li Dan, Wall Street Journal

The Federal Reserve recently decided to pause interest rate cuts again, and Chairman Jerome Powell reiterated afterward that the Fed is not in a hurry to act and does not believe it should preemptively cut rates in response to tariff shocks, once again contradicting U.S. President Donald Trump, who has repeatedly urged for immediate rate cuts.

On Wednesday, May 7, Eastern Time, the Federal Reserve released a monetary policy statement that added a new line: "The risks of rising unemployment and inflation have increased." At the subsequent press conference, Powell was asked which issue needs to be addressed first during his tenure, unemployment or inflation.

Powell stated that the risks of rising unemployment and inflation are intensifying. It is currently unclear which risk is more concerning. "It is too early to draw conclusions now." Powell believes that both unemployment and inflation risks need to be monitored simultaneously, and there may have to be trade-offs between them.

When asked if the Federal Reserve needs a long time to understand the developments, Powell emphasized, "I think we don't know." He reiterated previous statements, saying the Fed will not rush to cut rates. He said:

"We believe there is no need to rush to adjust interest rates."

"We believe we can be patient, and we will focus on the data."

At the same time, Powell emphasized that Trump's high tariffs could potentially drive up unemployment and inflation. He said:

"If the announced significant tariff increases persist, it could lead to rising inflation, slowing economic growth, and increasing unemployment."

Current Monetary Policy is Moderately Restrictive; Caution is a Clear Decision

Powell commented on the U.S. economy, stating that it remains robust. The labor market is generally balanced, at or near full employment. Inflation growth has significantly slowed. Wage growth continues to trend moderately.

Powell indicated that the current Federal Reserve monetary policy is moderately or slightly restrictive. He said, "The underlying inflation outlook is good."

Commentators noted that this implies Powell acknowledges that the current monetary policy is still suppressing inflationary pressures, and interest rates are not at a neutral level.

Powell reiterated that the Fed's policy is in good shape, and there is no pressure to take action on rate cuts, stating, "We can act quickly when the time is right."

Powell mentioned that the Fed does not know where trade policy is headed. But for now, "for us, caution and observation is a fairly clear decision." He stated that businesses, market participants, and forecasters are all watching developments, insisting that "everyone is waiting."

Commentators believe that based on the information currently revealed by the Fed, the threshold for a rate cut in June is quite high.

If High Tariffs Persist, the Fed's Goals Will Not Progress for at Least a Year

When asked about the path to a soft landing, Powell reiterated that the Fed is still unclear about the direction of tariffs and other trade policies.

Powell believes that if Trump maintains high tariffs, the Fed will not be able to make progress on its dual mandate of inflation and employment. He said, "For at least the next year," the Fed's goals may not make further progress.

"Given the scope and scale of the tariffs, we are likely to find that the risks of rising inflation and unemployment will certainly increase. If that is the case, if tariffs are ultimately implemented at levels we cannot yet determine, we will not be able to make further progress on our goals. We may see this process delayed."

He pointed out that the Fed will not issue predictions about the likelihood of a recession.

Powell stated that businesses are delaying investment decisions, and households are postponing consumption spending decisions. In such a situation, the Fed cannot take "preemptive" action. He said that last fall's Fed rate cuts were not preemptive, and if there was any difference, it was that they came a bit late.

"This is not a situation where we can act preemptively because we really do not know how to respond to this data until we see more data."

Powell indicated that in some cases, a rate cut this year is appropriate, while in others, it is not. "I cannot confidently say I know what the appropriate path is unless we further understand how this issue will resolve and its economic impact on employment and inflation."

The Fed's meeting statement indicated that uncertainty regarding the economic outlook has "further" increased. Powell also mentioned uncertainty at the press conference, saying:

"My intuition tells me that the uncertainty surrounding the economic trajectory is extremely high."

Powell stated, "Typically, things will gradually become clearer, and the right direction will also become evident." Meanwhile, he believes, "Our (U.S.) economy is performing well."

Tariff Shocks Have Not Yet Arrived; Policy Impact on Inflation May Be Temporary or More Persistent

Powell still believes that the impact of the Trump administration's policies on inflation may be temporary.

"The impact on inflation may be temporary, reflecting a one-time change in price levels." But "the inflation impact may also be more persistent."

When asked if the tariff shocks have not yet arrived, he replied, "Not yet." "People are worried about inflation, worried about tariff shocks, but that shock has not yet arrived."

Powell stated that the Fed is committed to anchoring inflation expectations. The Fed may find that achieving price stability and full employment could conflict. Currently, the Fed is ready and waiting for policy certainty.

Powell said, "Right now, we see inflation fluctuating at quite low levels."

Powell indicated that there is no need to take action now, and there is no data supporting action, reiterating more than once, "We just need to wait and see how things develop."

Commentators noted that this means the Fed is in a passive rather than active mode. From the market's perspective, there is still some distance from triggering the Fed Put, the so-called Fed put option that anticipates the Fed will step in to support the market in the event of a significant downturn.

Negotiations May Substantially Change Trade Situation or May Not

Regarding the upcoming high-level U.S.-China economic and trade talks, Powell stated that he cannot comment directly.

Powell mentioned the so-called reciprocal tariffs announced by the Trump administration on April 2, reiterating that the level of new tariffs far exceeds the Fed's expectations.

However, he immediately added that the U.S. "seems to be entering a new (trade) phase," as the Trump administration is initiating preliminary trade negotiations with some important U.S. trading partners. This could "substantially change the situation, or it may not." "We cautiously avoid making conclusive judgments when facts change."

When discussing trade policy, Powell stated, "Ultimately, this is for the government to decide. It is their responsibility, not ours."

U.S. GDP May Be Revised Upward; Import Surge Makes Data Difficult to Interpret Accurately

In line with statements from Trump administration officials, Powell expects that U.S. GDP data may be revised upward.

Powell stated that various survey results indicate that tariffs are raising inflation expectations. He believes that trade issues complicate the measurement of GDP. The surge in imports in the first quarter will make GDP data difficult to interpret accurately.

Powell said that GDP data conveys one signal, while the "Private Domestic Final Purchases" (PDFP) data, which excludes inventories and government spending, may convey another signal. This may be more difficult for the general public to understand. Overall, this situation does not fundamentally change the Fed's policy path.

Powell believes that the potential disconnect between consumer sentiment surveys and actual consumer spending is "another reason for the Fed to remain cautious."

When asked about the Fed's tools to respond to supply chain disruptions, Powell replied, "We don't have those tools at all." He added that it depends on the government and the private sector.

Not Influenced by Trump's Calls; Has Not Requested Meeting with the President

Powell stated that Trump's calls for rate cuts "will not affect our work at all." He said, "We will always do the same thing, which is to use our tools to promote maximum employment and price stability for the benefit of the American people. We will only consider economic data, outlook, and risk balance, and nothing more. That is all we need to consider."

When a reporter asked Powell about Trump's previous statement that he would not remove him from the position of Fed Chair, Powell replied that he had nothing to say about it.

Another reporter asked if Powell might continue to serve as a Fed governor after his term as chair ends in May 2026. Powell also stated that he had no comment on that.

When asked why he has not met with Trump during his new presidential term, Powell replied, "I have never requested to meet with any president, nor will I ever."

Unsustainable Path of Government Debt Growth

A reporter asked if the Trump administration's spending cuts could impact economic growth. Powell stated that the Fed takes Congress's budget actions for "granted." Congress does not need the Fed to provide advice on fiscal policy, just as the Fed does not need Congress to provide advice on monetary policy.

However, Powell reiterated the warning that the fiscal path is unsustainable. He said:

"There is one thing we know for sure: the current trajectory of government debt growth is unsustainable. The debt itself is not at an unsustainable level, but the growth path is unsustainable."

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