US President Donald Trump's tariffs will likely push up prices and constrain growth, and could put the Federal Reserve in the unenviable position of having to choose between tackling inflation and unemployment, the central bank's chair has said.
"Tariffs are highly likely to generate at least a temporary rise in inflation," Fed Chair Jerome Powell told the Economic Club of Chicago, warning that the inflationary effects "could also be more persistent".
"Avoiding that outcome will depend on the size of the effects, on how long it takes for them to pass through fully to prices, and, ultimately, on keeping longer-term inflation expectations well anchored," he added, echoing similar remarks earlier this month.
Unlike some other central banks, the US Fed has a dual mandate from Congress to ensure both stable prices and maximum sustainable employment over time.
It keeps those twin objectives in balance by lowering or raising interest rates, which act as either a throttle or a brake for demand in the world's largest economy.
Mr Powell said that while the Fed's employment and inflation goals were largely in balance, policymakers could find themselves in the "challenging scenario in which our dual-mandate goals are in tension".
US markets extend losses
US financial markets fell following Mr Powell's remarks, extending earlier losses, with the tech-rich Nasdaq Composite down 3.1% at 9pm this evening Irish time.
Mr Trump's stop-start tariff policy has unnerved investors and trading partners unsure about the long-term strategy, and what it might mean for international trade.
Amid the rollout of the tariffs, global financial markets spiralled, pushing volatility to heights not seen since the onset of the Covid-19 pandemic.
"You'll probably see continued volatility," Mr Powell said today. "But I wouldn't try to be definitive about exactly what's causing that."
"I would just say markets are orderly and they're functioning kind of as you would expect them to in this time of high uncertainty," he added.
Most economists have warned that tariffs will push up prices - at least temporarily -- while acting as a drag on growth.
The Trump administration has insisted that the levies are just one part of an overall economic agenda including tax cuts and deregulation designed to stimulate supply, boost growth, temper inflation, and return manufacturing jobs to the United States.
Tariffs would be "likely to move us away from our goals," Mr Powell said, referring to the Fed's dual mandate.
California to sue US government over Trump tariffs
Separately, California has filed a lawsuit seeking to block President Trump's sweeping tariffs on foreign trading partners, accusing him of abusing his powers and inflicting financial harm on the state and nation.
President Trump imposed 10% tariffs on goods from all countries and higher tariffs for countries the administration says have high barriers to US imports, most of which he later paused for 90 days.
He also imposed a 145% tariff on China, with exceptions for certain electronics.
China has retaliated with a 125% tariff against the US, and the European Union has approved tariffs to retaliate as well, though they are currently paused.
The US Constitution vests the authority to impose tariffs in Congress, and the law that President Trump cites as authority for his new tariffs, the International Emergency Economic Powers Act (IEEPA), does not allow the president to "tax all goods entering the United States on a whim," the state said in its lawsuit.
"President Trump's new tariff regime has already had devastating impacts on the economy, creating chaos in the stock and bond markets, wiping out hundreds of billions of dollars in market capitalisation in hours, chilling investment in the face of such consequential presidential action with no notice or process, and threatening to push the country into recession," the lawsuit said.
California, the world's fifth-largest economy and the largest importer of goods among US states, "bears an inordinate share" of the tariffs' costs," according to the lawsuit.
Tariffs could cripple California's 12 ports, which take in 40% of goods imported to the US and provide steady tax revenue for the state.
And retaliatory tariffs from China and other nations could harm California's agricultural exports, which totaled $23.6bn (€20.7bn) in 2022, potentially costing thousands of jobs, according to the lawsuit.
White House spokesman Kush Desai said today that California Governor Gavin Newsom should focus on addressing crime, homelessness, and high prices in his state instead of trying to block President Trump's tariffs.
"The entire Trump administration remains committed to addressing this national emergency that's decimating America's industries and leaving our workers behind with every tool at our disposal, from tariffs to negotiations," Mr Desai said.
In executive orders imposing the tariffs, President Trump had invoked laws including the IEEPA, which gives presidents special powers to combat unusual or extraordinary threats to the US.
The Republican president has said that the United States' net trade deficit relative to the rest of the world is a national emergency endangering its manufacturing capacity and making it dependent on foreign adversaries.
In today's lawsuit, filed in federal court in San Francisco, Mr Newsom and California Attorney General Rob Bonta, both Democrats, asked a judge to bar the Department of Homeland Security and Customs and Border Protection from enforcing the tariffs.
The Trump administration already faces three similar lawsuits - one in the New York-based Court of International Trade by business advocacy group Liberty Justice Center seeking to block all of the tariffs, one in Florida federal court by a small business owner seeking to block the tariffs on China, and a third filed in Montana by members of the Blackfeet Nation - a Native American tribe that spans Montana and Canada's Alberta's province - challenging President Trump's tariffs on Canada.
Earlier, China warned it is "not afraid" to fight a trade war with the United States and reiterated calls for dialogue, after President Trump said it was up to Beijing to come to the negotiating table.
"If the US really wants to resolve the issue through dialogue and negotiation, it should stop exerting extreme pressure, stop threatening and blackmailing, and talk to China on the basis of equality, respect and mutual benefit," foreign ministry spokesman Lin Jian said.
And yesterday, the US President said "the ball is in China's court. China needs to make a deal with us", according to a statement read out by Press Secretary Karoline Leavitt at a briefing.
Beijing responded today by saying it was "the US that initiated this tariff war".
"China's position has been very clear. There is no winner in a tariff war or a trade war," Mr Lin said. "China does not want to fight, but it is not afraid to fight."
A top Chinese economic official said US tariffs were putting "pressure" on the country's economy and trade, even as it unveiled forecast-beating first quarter growth.
"At the moment, the imposition of high tariffs by the US will put certain pressures on our country's foreign trade and economy," Sheng Laiyun, deputy commissioner of China's National Bureau of Statistics, told a press conference.
China said its economy grew a forecast-beating 5.4% in the first quarter as exporters rushed to get goods out of factory gates ahead of new US tariffs.
Official data offered a first glimpse into how trade war fears are affecting the Asian giant's fragile recovery, which was already feeling the pressure of persistently low consumption and a property market debt crisis.
China's National Bureau of Statistics said that "according to preliminary estimates, the gross domestic product in the first quarter... (was) up by 5.4% year on year at constant prices".
Retail sales, a key gauge of consumer demand, climbed 4.6% year-on-year, the NBS said, while industrial output soared 6.5% in the first quarter of the year, up from 5.7% in the final three months of 2024.
However, China warned the global economic environment was becoming more "complex and severe" and that more was needed to boost growth and consumption.
"The foundation for sustained economic recovery and growth is yet to be consolidated," the NBS said, adding there was a need for "more proactive and effective macro policies".
