Powell Leans Dovish with "Transitory" Base Case for Tariffs

Alexa Sinsheimer

The Federal Reserve announced no change to its benchmark rate Wednesday, emphasizing a cautious approach in the face of elevated economic uncertainty. Fed Chair Jerome Powell reinforced the committee’s stance that patience remains the best course of action as they assess the “net effects” of new policy.

The latest Summary of Economic Projections showed no change to the median number of expected rate cuts this year, holding steady at two. The GDP growth outlook was revised a touch lower versus the forecasts from mid-December. Meanwhile, the median forecast for inflation, using the Fed’s preferred measure of core PCE, inched up to 2.8% from 2.5% in December. Participants’ assessments of uncertainty in their inflation and growth projections rose markedly compared to December.

Tariffs Take Center Stage

Naturally, a key focus of yesterday’s press conference was tariffs, given heightened attention on how new trade policy will impact inflation and growth. At the press conference following the January FOMC, there were 14 mentions of the word “tariff.” On Wednesday, that number surged to 47. Powell was reluctant to say much on the matter back in January, but struck a largely dovish tone, noting that his base case is tariffs will have a "transitory" effect on inflation.

Economic Data vs. Sentiment: A Reality Check

Powell acknowledged concerns over weakening sentiment data, noting that while recent surveys indicate “heightened uncertainty” among consumers and businesses—with tariffs identified as a major driver—hard data remains solid. He stressed that if weakened confidence began to adversely affect the economy, "we'll know it very quickly." Powell also pointed out that the link between survey sentiment and actual consumer behavior is not always the most reliable. “There have been plenty of times where people are saying very downbeat things about the economy and then going out and buying a new car.”

Market Reaction

Markets rallied on Powell’s comments, with the S&P 500 ending the day up just over 1%. The number of cuts by year end (per fed funds futures) also rose slightly as investors priced in a less hawkish Fed.

More from the author

Alexa Sinsheimer
Share
Disclosures (show)
FS Insight

Sign in to read the report!

We have detected you are an active member!

Ray: 97650a-17756c-0e2555-2adfd0-8985d0

Don't Miss Out
First Month Free

Events

Tickers

Trending tickers in our research