Powell Issues Stark Warning On Economic Toll Of Tariffs, Says Fed Is Watching CRE Lenders Closely

Federal Reserve Chair Jerome Powell warned Wednesday that the impact of the Trump administration's sweeping tariffs are likely to include higher inflation and slower growth.

But banks that lend to commercial real estate borrowers are probably in a good position to withstand future economic blows — though the Fed will be watching the relatively untested private credit lending market closely.

In his strongest statement since the imposition of reciprocal tariffs on a host of nations, the Fed chair said tariffs are “highly likely” to generate at least a temporary rise in inflation, and those inflationary effects could also be persistent.

Powell also predicted higher inflation and weak growth at an appearance earlier this month. But he expanded on those comments during a speech and moderated conversation at the Economic Club of Chicago on Wednesday. 

“The level of tariff increases announced so far is significantly larger than anticipated, and the same is likely to be true of the economic effects,” he said. 

Even after President Donald Trump enacted a 90-day pause on some tariffs one week ago, he kept some levies in place. This includes those on Chinese imports, which the White House said Tuesday may be up to a 245% charge on certain goods “as a result of [China's] retaliatory actions.” He also left in place a 10% minimum tax on most countries and a 25% tariff for steel, aluminum and imported vehicles and parts.

The scale of the Trump administration's tariffs is larger than even the Fed's
“upside case” scenario, Powell said. As a result, the central bank may find itself in a challenging scenario in which its dual mandates of maximum employment and stable prices are in tension. 

“The labor market is still strong, but the shock that we're experiencing, the impulses we're feeling, are for higher unemployment and higher inflation,” Powell said. “Our tool only does one of those two things at the same time. So it's a difficult place for central banks to be in, in terms of what to do.” 

Although the Fed isn't facing those conditions now, it very well could in the future, Powell said.

Trump fired back on the Fed chair Thursday morning, calling for the Fed to lower interest rates and saying on Truth Social, “Powell’s termination cannot come fast enough!”

The president doesn't have the power to fire commissioners at independent agencies like the Fed, though that legal precedent is under review at the Supreme Court.  

In addressing how the Fed would handle policy decisions, Powell said the central bank will look at how far the economy is from reaching its two goals and the pace at which the economy might reach those goals.

It will then make a “very difficult judgement” as to how to proceed. 

Businesses and households are reporting “incredibly high uncertainty” in sentiment surveys, and Fed research shows some are putting investing and purchasing decisions on pause, Powell said.

If uncertainty remains high, investors' expected rates of return would have to be higher to compensate for the elevated risk, and the U.S. may look less attractive as a jurisdiction.

There's no road map for how to handle this situation, Powell said. The most recent case of tariffs at elevated rates was the Smoot-Hawley Tariff Act in 1930. 

“These are very fundamental changes in long-held, in some cases, policies in the United States,” Powell said. “There isn't a modern experience in how to think about this.”

Powell also addressed concerns about distressed commercial real estate loans on bank balance sheets and the rise of private credit lending to CRE. 

The Fed has been working for four or five years with small and midsized banks that have elevated concentrations of CRE in their portfolios, some of which is troubled, to ensure those banks have a plan for handling those assets, Powell said. The central bank has examined whether those banks have capital and can absorb any potential losses.

“I think our banking system is well capitalized with liquidity and is quite resilient right now to the kind of shocks that it may face,” Powell said. 

The Fed chair also acknowledged that private credit outside of traditional banking has grown enormously since the pandemic.

That portion of the financial sector hasn't been through a “significant credit event” and doesn't follow the same regulations as the banking system, so the Fed is watching it carefully, Powell said. 

“As that great Chicagoan Ferris Bueller once noted, ‘Life moves pretty fast,’” Powell said. “For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance.”

UPDATE, APRIL 17, 9:30 A.M. ET: The story has been updated with comments Trump made in response to Powell's speech.