Federal Reserve Chair Jerome Powell expressed concern on Thursday that the current high-interest rates might persist longer than anticipated.
He pointed to U.S. President Donald Trump’s tariff policies as a potential catalyst for supply shocks, which could slow economic growth and reignite inflation.
A representative example of a supply shock is the 1970s oil crisis. Middle Eastern oil-producing nations weaponized oil, reducing supply to pressure Western countries supporting Israel. Countries worldwide, including the U.S. and European countries, experienced a new phenomenon called stagflation, where prices soared due to exploding oil prices while economic growth retreated.
In his speech for the Thomas Laubach Research Conference held in Washington, D.C., Powell advised considering the possibility of prolonged high interest rates.
He noted that over the past five years, the Fed has witnessed rapid inflation and consequently raised interest rates at an unprecedented speed.
However, Powell cautioned that this might not be the end. He stated that even if long-term inflation expectations broadly align with the Fed’s 2% target, a return to near-zero interest rates is unlikely in the near future.
Powell said that higher real rates may also reflect the possibility that inflation could be more volatile going forward than in the inter-crisis period of the 2010s. He noted that we may be entering a period of more frequent, and potentially more persistent, supply shocks—a difficult challenge for the economy and for central banks.
The Inter-crisis Period of the 2010s refers to the crisis that occurred within the economy during the 2010s.
This period was a time when the economy faced high change and uncertainty amidst several variables, including the aftermath of the 2008 financial crisis and the rise of social media.
Following the 2008 financial crisis, the Fed maintained near-zero interest rates for seven years. Starting with a 0.25 percentage point increase in March 2022, they initiated a series of rate hikes, totaling 11 increases by July 2023. The target range for the federal funds rate surged from 0-0.25% to 5.25-5.5% during this period.
However, from September through December of 2024, the Fed lowered the benchmark interest rate by 1 percentage point to a range of 4.25-4.5%, maintaining that level throughout this year.
While not directly mentioning Trump’s tariffs in his speech, Powell emphasized that recent tariffs could dampen growth and elevate inflation. He implied that Trump’s tariffs might cause side effects similar to a supply shock.
Meanwhile, Trump continues to pressure the Fed to lower interest rates. Following the release of stable Consumer Price Index (CPI) data for April on Tuesday, he strongly urged Powell for a rate cut.
