Powell Attributes Persistent Inflation to Trump Tariffs as Energy Shock Stalls Rate Cuts
Fed chair quantifies tariff pass-through at 0.5–0.75 percentage points while Middle East crisis creates impossible policy bind between baseline inflation and demand destruction.
Federal Reserve Chair Jerome Powell explicitly attributed up to three-quarters of a percentage point of inflation above the Fed’s target to Trump administration tariffs, marking the central bank’s clearest acknowledgment yet that trade policy has structurally elevated the inflation baseline. Speaking after the Fed held rates at 3.5–3.75% on March 18, Powell stated that tariffs account for “between a half and three-quarters” of the gap between current core PCE inflation—running at approximately 3%—and the Fed’s 2% target, according to MarketScreener. The characterization contradicts recent administration claims of tariff de-escalation and abandons the transitory framing that dominated Fed communications through 2025.
“Some big chunk of that, between a half and three-quarters, is actually tariffs, so we’re looking for progress on that.”
— Jerome Powell, Federal Reserve Chair
The timing compounds Powell’s challenge: simultaneous energy price shocks from the Iran Conflict have pushed Brent crude to $108.78 per barrel as of March 18, up 80% since U.S.-Israeli strikes on February 28 triggered near-total shutdown of the Strait of Hormuz, per Fortune. Powell acknowledged the dual pressure explicitly: “Higher energy prices will push up overall inflation, but it is too soon to know the scope and duration of the potential effects on the economy,” he said in the post-meeting press conference, according to NBC News. The Fed revised its 2026 inflation projection to 2.7%, up from 2.4% in December, while maintaining its forecast of just one rate cut this year—down sharply from market expectations of multiple cuts entering the quarter.
Tariff Pass-Through Quantified
Powell’s testimony before the Senate Banking Committee provided the most detailed attribution of tariff-driven inflation the Fed has offered. In response to questioning, Powell confirmed that tariffs are “driving Fed projection of higher inflation,” per the Senate Banking Committee. Goldman Sachs had previously estimated Trump’s tariffs caused inflation to increase by 0.5 percentage points in 2025, with an additional 0.3 percentage point forecast for the first half of 2026, according to CNN Business. Powell’s range aligns closely with private-sector estimates but represents the first time the Fed chair has publicly quantified the impact.
The language shift matters for policy sequencing. Rather than characterizing tariff effects as temporary price-level adjustments that the Fed could “look through,” Powell framed them as ongoing pressures requiring sustained vigilance. “The forecast is that we will be making progress on inflation, (but) not as much as we hoped,” Powell said, per CNN Business. The February producer price index rose 0.7% month-over-month—the largest annual increase since February 2025 at 3.4% year-over-year—suggesting tariff pass-through continues to accelerate rather than fade, according to CNBC.
Energy Shock Resets Rate Path
The Strait of Hormuz closure has created an immediate supply disruption of historic scale. Global oil flows through the strait have dropped from 20 million barrels per day to a trickle, with the International Energy Agency projecting global supply will plunge by 8 million barrels per day in March, according to the IEA. The agency coordinated a 400 million barrel emergency reserve release, with the U.S. committing 172 million barrels over 120 days, per Fortune. Despite the release, Brent crude has held above $108, raising the risk that energy inflation becomes embedded in consumer expectations.
Powell’s concern centers on second-order effects. “Near-term measures of inflation expectations have risen in recent weeks, likely reflecting the substantial rise in oil prices caused by the supply disruptions in the Middle East,” he said, according to CNBC. The Fed chair cited the accumulation of shocks—”the tariff shock, the pandemic, and now we have an energy shock of some size and duration”—as creating conditions where inflation expectations could de-anchor. Market repricing was immediate: CME FedWatch probabilities for a June rate cut collapsed from 79.5% before the meeting to 18.4% after, with December cut odds at just 60.5%, per CNBC.
The Stagflation Bind
Labor market deterioration complicates the Fed’s hawkish tilt. February job losses totaled 92,000 with the unemployment rate rising to 4.4%, creating a textbook stagflation scenario where inflation runs above target while employment weakens. Powell conditioned the Fed’s single projected 2026 rate cut on inflation progress: “The rate forecast is conditional on the performance of the economy, so if we don’t see that progress, then you won’t see the rate cut,” he said. The Fed’s Summary of Economic Projections maintained the median expectation of one cut this year, unchanged from December despite market hopes for acceleration, according to CNBC.
The Fed’s tariff attribution directly contradicts Trump administration messaging on trade policy de-escalation. Powell’s quantification of structural inflation from tariffs implies that even if energy prices stabilize, the Fed faces an elevated baseline that cannot be addressed through demand-side tightening alone—raising questions about whether Monetary Policy can restore 2% inflation without fiscal policy reversals.
The impossible choice facing Powell: tighten further to combat tariff- and energy-driven inflation, risking deeper labor market damage, or ease to support employment while inflation expectations drift higher. Powell’s language suggests the Fed has chosen the former. “You worry that is the kind of thing that can cause trouble for inflation expectations,” he said of the accumulated shocks. The Fed’s credibility depends on demonstrating it will not accommodate structurally higher inflation, even if the drivers—trade policy and geopolitical conflict—lie outside the central bank’s control.
What to watch
- March core PCE data (due late April) will test whether tariff pass-through is stabilizing or accelerating—any reading above 2.8% annualized likely pushes June cut probability below 10%.
- Strait of Hormuz reopening timeline and strategic reserve drawdown pace—if Brent holds above $100 through Q2, inflation expectations surveys (Michigan, New York Fed) become critical Fed inputs.
- April FOMC minutes for discussion of tariff policy scenarios—whether the Fed models tariff reversal as a condition for returning to 2% target.
- Labor market momentum in March payrolls (due early April)—another month of net job losses would force Powell to address the trade-off between inflation and employment mandates explicitly.
Powell’s March testimony represents the clearest signal yet that the Fed views current inflation as policy-driven rather than transitory. With Kevin Warsh’s confirmation as Powell’s successor stalled in the Senate, the current chair may serve longer than anticipated—cementing the March framework as the Fed’s operating doctrine through at least mid-2026. The rate path now hinges on two variables the Fed cannot control: whether Trump reverses tariffs and whether the Iran conflict escalates further. Until one or both resolve, Powell has effectively ruled out the accommodative pivot markets priced in at the start of the quarter.