Powell Refuses to Take the Media’s Tariff Panic Bait
The financial press is hyperventilating about Trump’s tariffs, but the Federal Reserve’s latest Summary of Economic Projections (SEP) makes clear the central bank isn’t buying the panic.
Instead, the Fed’s view is that the inflationary impact of tariffs will be both transitory and relatively small. Fed Chairman Jerome Powell made it clear during his press conference that while the Fed sees tariffs as contributing to higher inflation projections, they are far from the dominant factor.
“A good part of it is coming from tariffs, but we’ll be working and so will other forecasters to try to find the best possible way to separate non-tariff inflation from tariff inflation,” Powell said.
A key point is that the Fed’s view is tariffs will contribute to higher inflation forecasts, not that they are currently driving up inflation. The March 2025 SEP shows only a modest transitory increase in the inflation forecast, raising the PCE projection to 2.7 percent from 2.5 percent and the core PCE projection to 2.8 percent from 2.5 percent. The projections for 2026 are only slightly elevated compared to previous forecasts—core is unchanged at 2.2 percent and overall inflation was bumped up to 2.2 percent from 2.1 percent—underscoring the Fed’s belief that tariff-induced inflation will be short-lived and minimal.
Those numbers are basically in line with the Fed’s target of two percent inflation. In other words, the Fed does not expect tariffs to be elevating inflation much or perhaps at all next year.
The Fed’s projections also assume “full retaliation” from other countries in response to Trump’s tariffs. This assumption likely exaggerates the projected economic impact, as not all countries are guaranteed to respond with retaliatory tariffs. Even if they do, retaliation is more likely to reduce U.S. exports than to raise import prices, which means it could hurt growth more than it raises inflation. It should also be noted that this assumption is not an economic one but a political one. Fed forecasters are betting foreign political leaders will defy the United States.
Despite Powell’s clear explanation that tariffs are just a small part of the inflation picture, reporters at yesterday’s press conference kept hammering away at the issue. Powell barely mentioned tariffs unless prompted by a question. The SEP makes it clear the Fed does not see tariffs as a major inflationary force, but the media seems determined to twist the narrative.
The Fed’s Evolving View of Economic Growth and Inflation
While the media obsesses over tariffs, the real story is the Fed’s evolving understanding of economic conditions. The truth is the Fed spent most of 2024 making the same mistake over and over. It underestimated inflation and overestimated economic weakness.
The Fed projected full-year 2024 GDP growth of 2.0 percent in June; and in September, it projected growth of 2.1 percent and unemployment as high as 4.4 percent by year-end. The actual growth for 2024 came in at 2.3 percent, and the unemployment rate ended the year at 4.1 percent. The Fed clearly thought the economy was much weaker than it actually was. Its unwarranted pessimism led to three rate cuts last year—in September, November, and December—on the mistaken belief that the economy needed more stimulus.
But the bigger mistake was the Fed’s chronic underestimation of inflation. PCE inflation ended 2024 at 2.6 percent and core PCE inflation at 2.8 percent, well above the September projections of 2.3 percent headline inflation and 2.6 percent core. Even in December, the Fed’s projection of 2.5 percent was still an underestimate.
The Fed is now trying to correct this error. The March 2025 SEP acknowledges stronger underlying inflation by raising projections to 2.7 percent for PCE and 2.8 percent for Core PCE. This isn’t primarily about Trump’s tariffs suddenly igniting inflation. This is about the Fed realizing that it was fundamentally wrong about the strength of inflationary pressures throughout 2024. It may be convenient for Fed officials to point to tariffs, but the fact is they were simply underestimating the strength of inflation last year, and now they are playing catch-up.
The SEP released this week reflects the Fed’s belief that the economic strength observed at the end of 2024 was transitory. The projection of 1.7 percent growth for this year is a reversion to the mean, bringing growth slightly below the long-term growth projection of 1.8 percent after a few years when growth ran above trend.
The Overblown Focus on Tariffs
The press’s fixation on tariffs is increasingly disconnected from the Fed’s assessment. Powell’s repeated comments about tariffs being only one part of the inflation puzzle seemed to fall on deaf ears. The Fed’s projections show that tariffs are not the primary driver of higher inflation forecasts. Instead, the Fed is grappling with the reality that inflationary pressures were stronger than anticipated well before Trump’s return to the presidency.
The Fed’s latest projections reflect a broader effort to correct past errors, acknowledging that inflation is stronger than previously thought and that economic growth will likely slow as a result of higher interest rates. The March 2025 SEP is not about tariffs; it’s about the Fed coming to grips with its previous mistakes and recalibrating policy to address a far more persistent inflation problem than it once anticipated.
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