Key Takeaways:

• Powell warned Trump's tariffs could lead to higher unemployment, slower growth, and faster inflation
• The Fed may face a "stagflation" scenario not seen since the 1970s
• Powell stated that a portion of tariff costs will be "paid by the public"
• US stocks tumbled as Powell spoke, with the Dow dropping 700 points
• Trump has delayed the massive "reciprocal" tariffs until July 2025
• The Fed is waiting for more data before making policy decisions

The Current Tariff Situation

Federal Reserve Chair Jerome Powell has given his strongest warning yet about the economic damage that President Trump's tariffs might cause. In a speech at the Economic Club of Chicago on April 16, 2025, Powell said these policy changes are "very fundamental" and unlike anything seen in modern history.

"These are very fundamental policy changes," Powell said. "There isn't a modern experience of how to think about this."

Powell pointed out that "the level of the tariff increases announced so far is significantly larger than anticipated" and the uncertainty around tariffs could hurt the economy for a long time.

The Tariff Situation So Far

The Trump administration has also created temporary exemptions for some electronic goods. The president has mentioned that more tariffs are likely coming for semiconductors, pharmaceuticals, copper and timber.

Economic Triple Threat: Growth, Jobs, and Inflation

Powell's comments highlight a scary possibility - the tariffs could create a triple economic threat that the US hasn't faced in decades:

1. Slower economic growth
2. Higher unemployment
3. Faster inflation

This combo is known as "stagflation," a problem that troubled the economy in the 1970s and early 1980s. Back then, the Fed, led by Chair Paul Volcker, chose to fight inflation even though it caused economic pain.

"We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension," Powell said.

The Fed's job is to keep both unemployment and inflation low, but Trump's tariffs make both goals harder to reach at the same time. Powell made it clear that the Fed's current plan is to wait and see how the economy responds to these policy changes before taking action.

Market Reaction to Powell's Warning

The stock market didn't like what Powell had to say. During his speech:

• The Dow Jones dropped 700 points (1.7%)
• The S&P 500 fell 2.5%
• The tech-heavy Nasdaq plunged 3.5%

Market expert David Russell from TradeStation said, "Jerome Powell just laid down the law with Trump. It was a clear warning about stagflation, and a declaration that the Fed won't enable the White House with rate cuts."

Who Really Pays for Tariffs?

Powell directly contradicted Trump's repeated claims that foreign countries pay for tariffs. Instead, he stated plainly that "a portion of the burden of tariffs is going to be paid by the public."

The Fed Chair explained that with the tariffs Trump has put in place, and more likely to come:

• "Unemployment is likely to go up as the economy slows"
• "In all likelihood, inflation is likely to go up as well"

While it's almost certain that prices will rise because of tariffs, Powell said it's still unclear how much they'll push up overall inflation levels.

The Fed's Difficult Position

The Federal Reserve now faces a tough challenge it hasn't dealt with in about 50 years. If the economy does move into stagflation, Powell said they would "consider how far the economy is from each goal, and the potentially different time horizons over which those respective gaps would be anticipated to close."

Chicago Fed President Austan Goolsbee explained the problem clearly: "A tariff is like a negative supply shock. That's a stagflationary shock, which is to say it makes both sides of the Fed's dual mandate worse at the same time."

He added, "Prices are going up while jobs are being lost and growth is coming down, and there is not a generic playbook for how the central bank should respond to a stagflationary shock."

Several Fed officials agree that waiting for more data is the best approach right now. Cleveland Fed President Beth Hammack said at an event in Columbus, Ohio: "Given the economy's starting point, and with both sides of our mandate expected to be under pressure, there is a strong case to hold monetary policy steady in order to balance the risks coming from further elevated inflation and a slowing labor market."

Hammack added, "When clarity is hard to come by, waiting for additional data will help inform the path ahead."

The Trump Tariff Timeline

President Trump has made tariffs a centerpiece of his economic policy since returning to office. The tariff rollout has happened in phases:

1. 25% tariffs on aluminum and steel
2. 25% tariffs on goods from Mexico and Canada that don't comply with free-trade agreements
3. 145% duties on Chinese imports
4. 25% tariff on cars, with separate tariffs on auto parts coming later
5. 10% baseline tariff on all US imports
6. Massive "reciprocal" tariffs that were briefly in effect on April 9, now delayed until July

The delay of the reciprocal tariffs gives businesses and the economy some breathing room, but most economists believe it's only a matter of time before these policies push up inflation, increase unemployment, and slow economic growth.

Consumer Impact and Inflation Expectations

The Fed is keeping a close eye on how Americans feel about prices. According to the University of Michigan's consumer survey, people's views on inflation have gotten worse. This matters because when people expect higher prices, they often make decisions that can actually create more inflation.

Even though inflation has come down a lot from its peak in June 2022, it's still running above the Fed's 2% target. This means the Fed has less room to cut interest rates to help the economy if it starts to slow down.

The central bank is now in a difficult position:

• Cut rates to help growth and jobs, but risk making inflation worse
• Keep rates high to fight inflation, but risk hurting the job market
• Wait and see, which is the current approach

Frequently Asked Questions

What are tariffs and how do they affect the economy?

Tariffs are taxes on imported goods. They can protect domestic industries but often lead to higher prices for consumers and businesses. When tariffs are widespread, they can slow economic growth, reduce employment, and increase inflation.

Who really pays for tariffs?

Despite claims that foreign countries pay tariffs, most economists, including Fed Chair Powell, agree that a significant portion is paid by domestic consumers and businesses through higher prices.

What is stagflation and why is it concerning?

Stagflation is a combination of high unemployment, slow economic growth, and high inflation. It's particularly challenging because policies that help one problem (like unemployment) can make another problem (like inflation) worse.

How might the Federal Reserve respond to tariff-induced economic changes?

The Fed is currently taking a wait-and-see approach, monitoring data to understand the actual impacts of tariffs. If stagflation develops, they'll need to balance their dual mandate of stable prices and maximum employment, possibly prioritizing one goal over the other.

When will the delayed "reciprocal" tariffs take effect?

The massive reciprocal tariffs that were briefly in effect on April 9 have been delayed until July 2025, according to the information provided.

How have markets reacted to the tariff announcements?

Markets have shown significant volatility, with major stock indexes falling when Powell discussed the tariffs' potential impacts. The Dow dropped 700 points, the S&P 500 fell 2.5%, and the Nasdaq slid 3.5% during Powell's speech.

What industries might be most affected by the tariffs?

Based on the announced tariffs, industries most likely to be affected include automotive manufacturing, electronics, steel and aluminum producers and users, and consumer goods importers, particularly those relying on Chinese manufacturing.

Could the tariffs be reversed or modified?

While the information doesn't specifically address this question, the delay of the reciprocal tariffs indicates that the administration is willing to adjust the timing of implementation. However, no information is provided about potential reversal or modification of the tariffs already in place.