Trump’s tariffs ‘highly likely’ to push prices up, Fed chief warns, prompting market slide

President Donald Trump’s tariffs are “highly likely” to spur a temporary rise in inflation, Federal Reserve Board Chair Jerome Powell said Wednesday, cautioning that those effects could end up being longer-lasting — prompting markets to slide and extend daylong losses.

Speaking before the Economic Club of Chicago, Powell said more persistent risks to inflation depend on how much tariffs end up affecting the economy and how long it takes trade policy to pass through to prices. Investors grew nervous throughout Powell’s remarks, especially because there is so much uncertainty around how long the inflation could last, triggering a market sell-off.

By market close, the Dow Jones Industrial Average was down roughly 700 points, or 1.7%, and the S&P 500 had fallen 2.2%. The tech-heavy Nasdaq composite index, which has born the weight of the trade war in particular, was down 3%. Chipmakers Nvidia and AMD said in company filings that Trump’s recent executive orders would result in major write-downs of the value of chips. Nvidia and AMD both saw their share prices fall roughly 7% in trading.

Powell said many of the administration’s policies — on trade, immigration, fiscal matters, and regulation — are still evolving. But higher inflation and slower growth are in store, he said, pushing central bankers further from their goals of stable prices and a prosperous job market. For example, supply-chain snarls from the trade war could lead to price hikes that last longer than a one-time bump.

“I do think we’ll be moving away from those goals probably for the balance of this year, or at least not making any progress,” Powell said.

Powell also said that as the Fed sets interest rates, it could end up in a place where its two mandates — stable prices and maximum employment — are “in tension.”

Typically, the Fed raises interest rates to combat inflation by making it more expensive to get all types of loans. The Fed lowers interest rates if it fears the economy is slowing too much and needs a boost. That could prove difficult if inflation is rising in the midst of a broader downturn.

Powell said that “we’re not experiencing that now, but we could well be in that situation.” Small-scale job losses, or the anticipation that prices could go up soon, would not be enough to push the Fed to act. Powell said it’s also too soon to know how the job market will fare through significant cuts to the government workforce and federal funding.

Yet Powell’s sharp warning comes as the economy and the Fed enter yet another uncertain chapter. After spiking to 40-year highs, inflation has been slowly easing toward a more normal 2%. Officials had been optimistic they were inching closer to the coveted “soft landing,” in which inflation returns to normal, the job market stays strong, and the economy keeps growing. But that path risks being thwarted by Trump’s trade war and looming uncertainty for businesses and financial markets alike.

For example, sentiment among home builders has been slumping for months and remained low in April. Powell said that in conversations with business owners, he routinely hears that uncertainty is higher than many have experienced in their lifetimes. That could lead people to pull back on investing and hiring, or to lay people off altogether.

At the same time, the financial markets have been in turmoil. The Nasdaq composite index is down more than 15% for the year, and the S&P is down 10%. Plus, investors are fleeing Treasurys and the dollar, assets usually considered safer when volatility hits markets. Powell said the markets are acting as expected in the face of so much tumult — but they are still functioning safely.

“Markets are struggling with a lot of uncertainty, and that means volatility,” he said.

Fed officials routinely say their outlook depends on how Trump’s policies unfurl. Part of the difficulty also stems from policies that change in a matter of days. Last week, the White House paused many of the steep import taxes on most countries for 90 days while further hoisting tariffs for China. It left in place a baseline 10% tariff on all imports from most countries and continued tariffs on imports of steel, aluminum, and autos.

The shift prompted many forecasters to pare back their expectations for a recession. But that possibility is still on the table.

Earlier this week, Fed Governor Christopher Waller described new tariff policies as “one of the biggest shocks to affect the U.S. economy in many decades.” There’s plenty of uncertainty based on how large the tariffs are, for example. But Waller said it’s possible the effects on prices, while steep, won’t be permanent, so long as expectations around longer-term prices stay grounded. Still, aggressive tariff policy could slow growth to “a crawl” and push unemployment up, he said.

Fed officials ultimately will have to parse short-term shifts — such as a temporary rise in prices — from more lasting effects, such as inflation or a broader slowdown. The distinction matters because officials set interest rate policy with the long-term health of the economy in mind, rather than reacting to blips or individual pieces of data. And they have been wrong before.

Fed leaders would also be hesitant to raise interest rates if the economy is slowing too much. That isn’t happening right now. The job market has stayed solid through upheaval in the federal government, and the unemployment rate is at a low 4.2%. The Fed’s preferred inflation gauge was at 2.5% in February.

But there are other concerning markers on the Fed’s dashboard, too. Retail sales jumped in March, with economists attributing the rise to consumers panic-buying before tariffs take hold. Industrial production fell in March, the first decline in four months. Stocks have also flashed red since Trump kicked off the trade war.

Trump has publicly pressured the Fed to lower interest rates to stimulate the economy. The Fed closely guards its independence from politics and takes pains not to get involved in fiscal policy. But Trump has historically ignored those norms, recently telling Powell to “stop playing politics!” in a post on social media.

“He is always ‘late,’ but he could now change his image, and quickly,” Trump wrote earlier this month.