Federal Reserve Chair Jerome Powell said the U.S. economy could suffer lasting damage if global investors no longer view it as a safe haven.
Speaking Wednesday afternoon at an event hosted by the Economic Club of Chicago, Powell said he hopes the recent uptick in economic uncertainty — driven by historically high tariff policies implemented by President Donald Trump — would eventually subside as investors, businesses and consumers come to terms with the changes.
But, he said, the new trade barriers amount to "fundamental changes" to long held polices with no modern parallels to compare against, so it is fair to question whether the impacts will be lasting.
"That's a difficult environment … people's expected rates of return would have to be higher … that would weigh on, to me, investment, just in general," he said. "If the United States were to become a jurisdiction where risks are just structurally higher going forward, that would make us less attractive as a jurisdiction."
Powell's comments come at a time of elevated concern about the appeal of U.S. government bonds and the dollar's status as a hedge against volatility. Despite the widespread stock market turmoil caused by Trump's tariff regime — including a 10% tax against all imports and,
Yields on 10-year Treasury notes — which rise as demand falls to encourage investment — jumped from less than 4% on April 4, two days after Trump's initial tariff announcement, to nearly 4.6% on April 11. Yields have fallen in the days since Trump
During the event, Powell said it is hard to pinpoint the exact cause of the bond market sell-off but said it was likely driven, at least in part, by hedge funds reducing their exposure to
Powell did not discuss the dollar's global standing, but noted that the Fed will stand ready to supply dollars to other central banks through its system of swap lines to bolster dollar funding markets.
Powell also weighed in on a variety of other topics during his onstage discussion with Raghuram Rajan, a finance professor at the University of Chicago and the former governor of the Reserve Bank of India, including regulation, government spending, the monetary policy outlook and the Fed's policy independence.
'Mainstreaming' of crypto
Powell welcomed efforts by Congress to
"We worked with Congress to try to get a framework, a legal framework, for stablecoins, which would have been a nice place to start. We were not successful," he said. "The climate is changing and you're moving into a sort of more mainstreaming of that whole sector."
He called stablecoins "a digital product that could actually have fairly wide appeal," but added that it was important to pair them with sufficient consumer protections and transparency requirements.
Powell also expects the Fed to adjust its policies toward
"We took a pretty conservative — and other bank regulators took an even more conservative — perspective on the guidance and rules we imposed on banks. I think there'll be some loosening of that," he said. "We'll try to do it in a way that preserves safety and soundness, but … fosters appropriate innovation and that it does so in a way that, again, doesn't put consumers at risk in ways they don't understand or make banks less safe and sound."
He also reiterated his commitment to finalizing the so-called Basel III endgame in partnership with new officials at the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency. He said he still believes that process could be wrapped up quickly.
"We're not so very far away from what would be a good, I think, outcome," he said.
DOGE cuts miss the mark
Powell's commentary also veered into fiscal policy, a subject from which he generally steers clear.
Asked about his views on the federal deficit, he repeated his usual refrain on the subject: that the level of the debt is not unsustainable but the government's spending path is, adding that is an area that should be addressed eventually and "sooner is better than later."
But, he also went a step further, critiquing recent efforts to chip away at the debt through piecemeal
"All of this domestic discretionary spending — which is essentially where 100% of the conversation is — is small as a percentage of federal spending and is … already declining as a percentage of federal spending," Powell said. "So, when people are focusing on cutting domestic spending, they're not actually working on the problem."
Instead, he said, the primary drivers of the deficit were Medicare, Medicaid, Social Security and, more recently, interest on debt — areas that "can only be touched on a bipartisan basis."
No firm guidance on interest rates
The conversation between Powell and Rajan opened with the Fed chair saying there was a "strong likelihood" that new trade policies will move the central bank further away from its goals for inflation and employment, an outcome that could put the central bank's two mandates — maintaining stable price growth and full employment — in "tension" with one another.
This would also present a unique challenge for the Fed, as high inflation generally calls for higher interest rates and rising unemployment suggests rates should be lower. If both arise at the same time — a phenomenon known as stagflation — the central bank would have to decide whether to spur demand and curb inflation.
Powell said that the Fed would respond to such a circumstance by focusing on whichever of the two is further from their target.
In prepared remarks, he also said the Fed's priority will be ensuring that any tariff-induced price increases are one-time jumps and do not trigger a sustained period of inflation.
"Our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem," he said.
Independence 'widely understood'
Rajan asked Powell if he felt recent actions and litigation — namely the administration's firing of two Federal Trade Commission officials — could make him and other Fed officials vulnerable to at-will firing.
Last month, Trump dismissed FTC commissioners Alvaro Bedoya and Rebecca Kelly Slaughter, both Democrats, without cause. The two responded by suing the government, setting up a challenge to a decades-old precedent that holds that appointees to independent agencies cannot be fired at will. Powell said the case could be impactful, but not for the Fed.
"I don't think that that decision will apply to the Fed, but I don't know, it's a situation where we're monitoring carefully," he said, adding: "Generally speaking, Fed independence is very widely understood and supported in Washington — [and] in Congress, where it really matters."
He also said emphatically that the central bank would not be swayed by outside voices as it considers changes to monetary policy.
"We're never going to be influenced by any political pressure," he said. "People can say whatever they want. That's fine. That's not a problem. But we will do what we do strictly without consideration of political or any other extraneous factors."
The line received raucous applause from the otherwise muted audience.
