Jerome Powell’s commitment to preventing the spread of price increases due to Donald Trump’s tariffs has led the president to label him “Mr. Too Late.” However, for the Federal Reserve chair, this moniker is preferable to being called Mr. Wrong.
A few months prior, Powell was guiding his colleagues and the economy towards what is known as a soft landing—a situation where both inflation and interest rates decrease smoothly while unemployment stays low. Trump’s extensive tariffs disrupted this outlook, raising expectations for diminished economic growth and increased inflation within the year.
In response, Federal Reserve officials have adjusted their strategy to what can be seen as planning a delayed rescue for the economy. This strategy involves maintaining steady rates long enough to curtail inflation while also being prepared to lower them to prevent a labor market collapse.
“They prefer being late to being wrong,” stated Aditya Bhave, senior U.S. economist at BofA Securities. “They are going to watch how things evolve with both mandates.”
Federal Reserve officials are anticipated to leave interest rates unchanged at their upcoming two-day policy meeting in Washington on May 6-7.
Recently, Powell and his colleagues have warned about the potentially persistent inflationary effects of the president’s import duties, emphasizing that the Federal Reserve’s role is to limit any rise in prices. This stance involves a firm approach on interest rates to manage price expectations and maintaining steady rates unless there is a significant unemployment increase.
“Our obligation is to keep longer-term inflation expectations well anchored and to ensure a one-time price level increase doesn’t become an ongoing inflation problem,” Powell commented at the Economic Club of Chicago on April 16.
These comments met with swift criticism from the White House, with Trump urging Powell to lower interest rates immediately to avert an economic slowdown.
However, waiting carries risks: once the unemployment rate begins to rise, it typically increases quickly, potentially tipping the economy into recession. Reducing interest rates prematurely could allow price pressures to resurface, a situation officials are eager to avoid following the post-pandemic inflation surge.
Managing a late economic rescue, according to some observers, could test Powell’s policy leadership, economic acumen, and timing.
“This is a new test for him,” observed Claudia Sahm, chief economist at New Century Advisors. “Both sides of the mandate are veering off course, and they will need to make a decision.”
Securing a soft landing after a surge of post-pandemic inflation has become a personal mission for Powell. In December 2023, he marked the peak of the Fed’s rate-increasing phase, having managed to cool the economy without halting expansion. At that time, inflation was slightly less than one percentage point above the Fed’s 2% target, down from a four-decade high of 7.2% in 2022.
When it became time to lower rates in September, Powell convinced his colleagues on the Federal Open Market Committee to support an aggressive half-point rate cut to bolster the labor market. They reduced rates by one percentage point over three meetings before holding them steady this year as inflation seemed to settle above their target.
By then, Trump had returned to the White House, and during the Fed’s March meeting, it became evident that the threat of tariffs would keep prices elevated. This led officials to signal expectations of higher inflation and slower growth.
Trump’s tariff initiatives came at a delicate time, with the previous five core inflation readings surprisingly high. The Fed’s preferred measure of underlying inflation stood at 2.8% in February, while economists predicted a reduction to 2.6% in March—still above the central bank’s target.
“They didn’t reinstate price stability,” and may have eased indefinitely, stated Lindsey Piegza, chief economist at Stifel Financial Corp. “I am worried about inflation stability, with or without the tariffs. We are at risk.”
These concerns extend beyond Federal Reserve observers. Consumer inflation expectations surged in April, based on a report from the University of Michigan. Economists surveyed by Bloomberg this month believe that the trade war makes the likelihood of a U.S. recession almost a coin flip.
A downturn could provoke greater hostility from the White House. Trump has hinted at dismissing Powell but later withdrew from the threat when it unsettled financial markets.
Should the central bank fail again to control inflation after being above target for four years, it could potentially lose credibility.
“We were so close to achieving the soft landing,” commented Diane Swonk, chief economist at KPMG. “The most significant mistake the Fed could make would be to induce further inflation as the economy weakens.”
This article was originally featured on Fortune.com.