Powell addressed inflation forecasts during a recent Q&A, stating that a portion of the increased forecasts is attributed to tariffs. He emphasised the importance of distinguishing between tariff and non-tariff inflation and noted that it is premature to determine if it is appropriate to overlook tariff-induced price increases.
The base case suggests that tariff inflation will be temporary and reliant on stable inflation expectations. Powell acknowledged the current labour market balance and expressed a cautious outlook on recession risks, indicating that while the chance of a recession has slightly increased, it remains low overall.
Monitoring Inflation Data
Recent inflation data will be closely monitored, particularly in relation to goods and non-housing services. Powell reiterated the significance of adapting policy as new information becomes available, highlighting an ongoing focus on the current economic data amidst elevated uncertainty.
Powell’s comments provide a direct indication that cost pressures associated with tariffs are being assessed separately from broader inflationary trends. This distinction is not minor—it affects how policymakers interpret price movements and how markets react to shifting expectations. If tariff-driven inflation is indeed transient, as the base case suggests, then broader policy decisions will rely more heavily on core inflation trends and whether longer-term expectations remain steady. Any deviation from this assumption could lead to reassessments.
Labour market stability remains central to the discussion. Powell gave a measured take, recognising that while employment conditions appear balanced, there is no guarantee this remains the case in the coming quarters. A gradual cooling or unexpected disruption could alter the inflation trajectory, which in turn could affect how policymakers adjust their stance. While the probability of a downturn is slightly higher than before, Powell made clear that it is not currently the primary concern. Growth expectations remain intact—for now.
A Forward Looking Approach
Attention will be placed on recent inflation reports, specifically within goods and services outside of housing. This segment has seen uneven pricing trends, and any unexpected movements could reshape the outlook. Powell reinforced that decisions will be data-driven, meaning each release in the coming weeks carries weight. Sudden surprises in either direction could prompt adjustments, particularly if broader inflation measures diverge from expectations.
A forward-looking approach remains essential. Policy must remain flexible, adapting as fresh economic signals emerge. While trade policies add a separate layer of inflationary influence, underlying demand trends remain the central guide. Powell’s remarks leave little doubt that the focus is on near-term metrics, with policymakers prepared to shift course should conditions demand it. Careful observation of upcoming reports will be necessary.
