During his latest press conference on monetary policy, Federal Reserve Chair Jerome Powell emphasized that the inflation outlook is highly uncertain and that the Fed’s projections should be treated with “a grain of salt.”
Inflation Drivers
Inflation remains above target and is being driven by identifiable, but still unresolved, forces. Tariffs account for a significant share of core inflation and are taking longer than expected to pass through the economy. According to Powell, goods inflation has shifted from being flat or negative before tariffs to running around 2%, with tariffs contributing approximately 0.5 to 0.75 percentage points to the ongoing inflation overshoot.
Inflation has now run above target for five years, increasing concern as a new price shock from war has pushed oil prices higher. Powell acknowledged that the war against Iran has pushed up near-term inflation expectations. He also cautioned that the size and duration of oil’s impact on inflation is uncertain.
Powell expressed frustration with the stickiness of core non-housing services inflation. The labor market is no longer generating inflationary pressure yet services inflation has not declined accordingly.
The added uncertainty from war and oil reduces confidence in any forecasts. Powell acknowledged the lack of confidence behind them, noting that participants are effectively making estimates without strong conviction. He quipped that “you gotta write something down.” He even shared that someone on the FOMC joked that “This is one of those SEPs [Summary of Economic Projections], where if we were ever to skip an SEP, this would be a good one.”
Powell summarized the situation plainly: “the thing I really want to emphasize is that nobody knows.”
(Uncertain) Economic Backdrop
Still, Powell insisted that the broader economy remains resilient, with steady growth and stable unemployment. Longer-term inflation expectations remain anchored near 2%, which continues to provide an important foundation for policy.
The current SEP reflects low conviction and high uncertainty. Inflation’s trajectory will depend on how tariff effects resolve, how energy prices evolve, and whether services inflation begins to improve.
In the meantime, the Fed as a group still has core PCE (Personal Consumption Expenditure) inflation gliding comfortably to the Fed’s target of 2% by 2028 despite the recent updrift in the Fed’s preferred inflation gauge. Thus, the Fed remains confident in the path for the economy despite the lack of conviction in the forecasts.
