(March 20): For weeks the US economic picture has been darkening. If Wednesday was an opportunity for Federal Reserve (Fed) Chair Jerome Powell to raise the alarm, he took a hard pass.

Speaking to reporters following a two-day meeting of policymakers, Powell downplayed mounting growth concerns and the price hits that could be on the way from President Donald Trump’s aggressive trade war. He even revived a once-abandoned term to say the inflationary impact of tariffs is likely to be transitory.

“As I’ve mentioned, it can be the case that it’s appropriate sometimes to look through inflation if it’s going to go away quickly without action by us, if it’s transitory,” Powell said.

He called that scenario the “base case”, but then hedged, saying officials “really can’t know” if the effect will be temporary.

Those comments, along with median forecasts showing officials — even if narrowly — still see two rate cuts this year, should help allay growing worries that inflationary pressures generated by tariffs will prevent the central bank from lowering rates if the economy weakens materially.

They followed the decision by the Federal Open Market Committee to keep its benchmark federal funds rate steady for the second straight meeting, in a target range of 4.25%-4.5%.

Asked about sagging sentiment from businesses and consumers, Powell said “hard data” show the economy is still solid. The Fed chief also went on to express confidence that long-run inflation expectations remain well anchored, despite a series of readings from a University of Michigan survey calling that into question. The most recent report showed consumers expect prices to rise at an annual rate of 3.9% over the next five to 10 years, the highest in more than three decades.

Yet Powell largely dismissed the data, calling it “an outlier” more than once.

“It is something that is quite eye-catching,” Aditya Bhave, an economist at Bank of America, said of the survey readings. “I was surprised the extent to which they’re downplaying it.”

Powell’s stance calmed financial markets. The S&P 500 moved higher as Powell spoke, and Treasury yields moved lower. But it also comes with risks.

His use of the word “transitory” was surprising to many precisely because the Fed employed the same word when inflation exploded following the onset of the Covid-19 pandemic. He — and many others — got it wrong then, so getting it wrong again, with the same word, could prove damaging to the Fed’s credibility.

“The question is, how much do tariffs work their way into the broader inflation process?” said Ellen Meade, a research professor of economics at Duke University and former special adviser to the Fed Board. “Powell seemed to focus on the initial shift in the price level — a one-time increase arising from tariffs — but not on the possibility that tariffs could result in persistently higher inflation.”

If a mistake is accompanied by a loss of control of inflation expectations, the results could be particularly painful for Americans. Economists generally view stable expectations as a crucial prerequisite to keeping price growth under control. If they become unmoored, beating down inflation becomes all the harder, resulting in more damage to the labour market.

Former Fed Chair Paul Volcker famously pushed the US into recession in the early 1980s in order to wrestle inflation expectations to the ground.

One commentator noted the political context that surrounded Powell’s remarks with the Trump administration seeking to exert authority over federal agencies and attacking those who resist.

“He’s walking on eggshells,” said Derek Tang, an economist at LH Meyer/Monetary Policy Analytics in Washington. “He doesn’t want the Fed to be in the cross-hairs from the White House. This is sort of a sensitive moment. For now the FOMC has bought itself some time with the first 100 basis points in cuts and Powell said we can sort of sit here for a while.”

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