Tariffs and Economic Activity in June 2025#

Powell’s Testimony on Tariffs#

• Economic Impact: Powell testified that the tariffs, described as significantly larger than anticipated, are expected to increase consumer prices and slow economic growth. He noted, “Increases in tariffs this year are likely to push up prices and weigh on economic activity,” potentially leading to a one-time price level shift or more persistent inflationary effects.
• Uncertainty: The Fed is adopting a wait-and-see approach due to uncertainty about how much tariff costs will pass through to consumers. Powell emphasized, “We really don’t know how much of that’s going to be passed through to the consumers. We just don’t know. And we won’t know until we see it.”
• Monetary Policy Stance: The Fed maintained interest rates at 4.25%–4.5% in June 2025, with no immediate plans for rate cuts. Powell rejected suggestions of a July cut, stating, “I don’t want to point to a particular meeting. I don’t think we need to be in any rush,” given a robust labor market and tariff uncertainties.
• Dual Mandate Tension: Tariffs could exacerbate tensions between the Fed’s dual mandate of price stability (2% inflation target) and maximum employment. Powell indicated that if inflation or unemployment deviates significantly from goals, the Fed would prioritize the more pressing issue, potentially keeping rates high to combat inflation or cutting them if growth weakens significantly.

Economic Context and Tariff Details#

• Tariff Scope:
  • 2025 Tariffs: Include a 10% baseline tariff on all U.S. imports, 25% tariffs on steel, aluminum, and autos, and a 145% duty on Chinese imports, with temporary exemptions for some electronics.
  • Reciprocal Tariffs: A February 13, 2025, memorandum outlined “reciprocal” tariffs to counter foreign trade policies, effective April 2, 2025, excluding USMCA trade and certain energy goods.
  • Legal Challenges: The Court for International Trade ruled IEEPA-based tariffs (e.g., fentanyl-related, reciprocal tariffs) unlawful, potentially reducing the effective tariff rate to 5% if overturned, down from 13–14%.
• Economic Projections:
  • Inflation: The Fed’s core PCE inflation forecast for 2025 rose to 3.1% from 2.8%, with some economists predicting up to 4% by year-end due to tariffs.
  • Growth: GDP growth is projected at 1.4% for 2025, down from 1.7%, with first-quarter 2025 growth at -0.1% due to tariff-related import surges and weakened consumer spending.
  • Consumer Impact: The Budget Lab at Yale estimates all 2025 tariffs could raise consumer prices by 2.3%, costing households an average of US$3,800 annually, with low-income households losing US$1,700.
• Business Sentiment: J.P. Morgan Research notes a sharp decline in business confidence due to tariff uncertainty, potentially accelerating into mid-2025, depressing spending and hiring.

Broader Economic Implications#

• Stagflation Risk: Powell warned of a potential “stagflationary shock,” characterized by higher inflation, slower growth, and rising unemployment, a scenario last seen in the 1970s. Economists like Kathy Bostjancic at Nationwide highlight the Fed’s challenge in balancing inflation control with growth support.
• Global Trade Tensions: China’s 34% retaliatory tariffs and the EU’s threats against U.S. whiskey exports signal escalating trade wars, further complicating economic forecasts.
• Labor Market: Despite tariff concerns, the labor market remains solid, with 228,000 jobs added in March 2025 and unemployment at 4.2%. However, rising continuing jobless claims suggest difficulties in reemployment, a trend to monitor if tariffs persist.
• Market Reactions: Powell’s remarks have fueled market volatility, with the S&P 500 dropping over 2% on April 16, 2025, after his Chicago speech, reflecting investor fears of prolonged high rates and economic slowdown.

Federal Reserve’s Policy Dilemma#

• Inflation Priority: Powell emphasized anchoring long-term inflation expectations, suggesting the Fed may tolerate short-term price spikes from tariffs but act if inflation becomes entrenched. This mirrors the 1970s approach under Paul Volcker, prioritizing inflation over growth.
• Rate Cut Outlook: Markets anticipate two to four quarter-point rate cuts by year-end, starting in June or July, but Powell’s caution suggests cuts may be delayed until tariff impacts clarify, potentially late 2025 or 2026.
• Neutral Rate (r)**: The Minneapolis Fed notes that tariffs may lower the neutral real interest rate (r) in the near term by raising input costs and reducing investment, implying current rates (4.25%–4.5%) are tighter than needed, though long-term r* effects depend on tariff revenue use.
• Consumer and Business Confidence: Surveys show consumer confidence at its lowest since January 2021 and small-business uncertainty near historic highs, driven by tariff fears, which could curb spending and investment.

Sentiment and Public Discourse#

• X Sentiment: Posts on X reflect alarm over Powell’s warnings, with users like @CalltoActivism attributing economic risks to Trump’s tariffs, predicting inflation and unemployment spikes. Others, like @StockMKTNewz, note the Fed’s wait-and-see stance, highlighting ongoing uncertainty.
• Economist Views: While J.P. Morgan predicts a 60% chance of global recession if tariffs persist, Moody’s and Pantheon Macroeconomics expect stagnation but not outright recession, citing potential exemptions and subsidies.

Connection to Consumption and AI De-Skilling#

• Consumption: Tariffs could reduce household purchasing power, countering China’s efforts to boost consumption (~38% of GDP) and straining U.S. consumption (~68% of GDP), as discussed in the World Economic Forum article. Higher prices may exacerbate inequality, particularly for low-income households.
• AI De-Skilling: The AEI report on AI de-skilling notes automation’s potential to displace mid-level knowledge workers, a trend tariffs could worsen by increasing costs for tech firms reliant on imported chips. Conversely, tariff revenues could fund retraining programs like ITAs or AAA, aligning with Orrell’s policy recommendations.

Conclusion#

Jerome Powell’s June 2025 testimony underscores the Federal Reserve’s cautious approach to tariffs, which are poised to raise inflation, slow growth, and potentially trigger stagflation. With interest rates steady at 4.25%–4.5%, the Fed is prioritizing inflation control while monitoring labor market and growth risks. Tariffs, costing households up to US$3,800 annually, threaten consumer confidence and global trade stability, complicating economic rebalancing efforts in the U.S. and China. Policymakers must balance short-term price pressures with long-term growth, potentially leveraging tariff revenues for workforce retraining to address AI-driven de-skilling. The Fed’s wait-and-see stance reflects the unprecedented scale of these trade policies, with clarity expected only as economic data emerges.