Fed Chair Powell Just Made His First Comments on Trump's Tariffs. Here's the Hidden Message for Investors.

For years now, Federal Reserve Chair Jerome Powell has been trying to guide the economy to a "soft landing." After inflation spiked in 2022 following pandemic stimulus and supply chain crunches, the central bank raised interest rates to bring inflation down. It's mostly done so, as inflation has fallen to under 3%, close to the Fed's goal of 2%, without causing a recession.

The second part of that process was lowering the benchmark federal funds rate back to the neutral rate, which the central bank estimated to be around 2.5%. The Fed began doing that in September, but those efforts seem to have stalled as consumer sentiment has weakened and inflation has remained stubborn.

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Now, with the economy at a crossroads after President Donald Trump kicked off a trade war with his tariff announcement on April 2, investors are keen to hear from Fed Chair Powell, who spoke today in his first public remarks since the global tariffs were announced.

Let's take a look at a few key takeaways from Powell's remarks, as well as the hidden message behind his comments.

Image source: Getty Images.

Powell: Inflation is likely to come back

Powell generally avoids commenting on policy from Congress or the White House. But speaking at a conference of the Society for Advancing Business Editing and Writing this morning, he did acknowledge the impact of the blanket tariffs announced on Wednesday, noting that other policy changes around immigration, fiscal policy, and regulation are having an impact on the economy.

However, the question he had about tariffs wasn't whether they would drive prices up or not, but for how long higher prices would persist. "While tariffs are highly likely to generate at least a temporary rise in inflation," he said, "it's also possible that the effects could be more persistent." He added that the Fed's obligations were to "make certain that a one-time increase in the price level does not become an ongoing inflation problem."

It shouldn't come as a surprise that tariffs would introduce a one-time price increase across several categories in the economy, but the larger risk is that tariffs set off a vicious cycle of inflation as a global trade war intensifies and businesses raise prices to pass along the cost of tariffs. The Fed made the mistake in 2022 of dismissing inflation as transitory, and it's reluctant to do so again.

Stagflation is a risk

The job market has thus far remained resilient, even as consumer confidence is waning and inflation has been sticky. The March employment report was stronger than expected, with the economy adding 228,000 jobs last month, but economists are anticipating a weakening job market.

Powell noted an elevated risk of higher unemployment and higher inflation, and though he didn't use the word "stagflation," those are its two components. The Fed's tools are not well suited to fighting both at the same time.

The Fed's primarily monetary policy tool is raising or lowering interest rates, to tighten or loosen the economy. In inflationary times, it would typically raise rates to control inflation, while in times o high unemployment, it would lower rates to stimulate borrowing and spending.

Powell said that if the Fed was faced with both inflation and unemployment pressure, it would focus on restraining the factor that was further away from its dual mandate of full employment and 2% inflation.

Image source: Getty Images.

Powell's hidden message

Uncertainty was a recurring theme in Powell's comments today, just as it was when he spoke in March following the Fed's decision to keep interest rates steady.

While he said that recent data shows the economy is still solid, he seemed to imply to investors that the economy could be in for some rocky times, as the stock market seemed to anticipate, considering a 10.5% slide in the S&P 500 (SNPINDEX: ^GSPC) in just a two-day span. While he didn't tell investors to buckle up, his comments reference new risks to the economy and erred toward unemployment and inflation getting worse before they improve.

What it means for investors

The Nasdaq Composite (NASDAQINDEX: ^IXIC) entered a bear market today, falling 5.8% to drop 22.7% off its all-time high set in December. The S&P 500 isn't far behind, falling nearly 6% today and sitting 17.4% below its high from February. It's been a painful couple of days for investors who check their portfolios regularly.

No one knows the short-term impact of the tariffs for certain, though Trump seems committed to keeping them.

For net buyers of stocks, it's a good idea to think of the sell-off as a buying opportunity, as valuations are suddenly much cheaper than they were a few days ago, and strong companies are likely to emerge from the current chaos and return to solid and steady growth.

For others, it's worth remembering that the U.S. stock market has endured much deeper drawdowns than this and then returned to new records. We'll learn more about the implications of tariffs in the coming weeks, but investors should remind themselves that the S&P 500 is still undefeated when it comes to delivering growth over the long term.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.