Powell's gamble: That the economy will reveal its true self in the next two months

Federal Reserve chief Powell suggested he was still committed to preserving the soft landing

- Nick Timiraos

Setting interest rates is sometimes more art than science, especially when the economy keeps defying predictions—a reality the Federal Reserve confronted head-on Wednesday.

There are two economic worlds the U.S. could be living in right now, and Fed officials might not know which one for months. In one, economic weakness that's been lurking beneath reasonably solid headline numbers finally surfaces. In the other, artificial intelligence investment and buoyant household wealth power the economy past trade-war headwinds.

The Fed held rates steady this week, and Fed Chair Jerome Powell kept his options wide open for its next gathering in September, promising little while ruling out nothing.

Officials are betting they can afford to wait at least two months for clarity on whether tariffs will slow economic activity, fuel inflation, or pass by with little effect. That patience comes with risks—on both sides.

Powell suggested he was still committed to preserving the soft landing it looked like the economy had achieved at the beginning of the year, in which inflation had declined without significant damage to the labor market. By pushing up prices of some goods, tariffs have since created crosswinds that could blow the Fed off course.

The Fed provided extraordinary stimulus when the Covid-19 pandemic hit five years ago and was slow to withdraw it, leading to a blitz of rate hikes in 2022 when inflation proved more stubborn.

On Wednesday, the Fed chair repeated the pledge he made four years ago to make sure any price increases wouldn't persist.

"We want to do that efficiently, though—efficiently," he said at a news conference. Cutting rates too soon could force the Fed to come back later and raise them. "That's inefficient," Powell said. But waiting too long could cause unnecessary damage to the labor market.