Jay Powell’s Fed navigated Trump’s first trade war. This time, it has less wiggle room.

When it comes to navigating this economy through a trade war, this isn’t Jerome “Jay” Powell’s first rodeo. 

He, of course, was Federal Reserve chair back in March 2018, when first-term President Donald Trump announced across-the-board 25% tariffs on steel and 10% on aluminum. Then a few months later, he slapped duties on $200 billion worth of Chinese imports, and threatened tariffs on Canada and Mexico. 

But the U.S. economy the Fed was managing back then was very different than the one it’s managing now. So are the Fed’s options for keeping it on track.

The obvious difference between the economies of 2018 and 2025? 

“I think there’s three words. It’s inflation, inflation, inflation,” said Ann Owen, an economist at Hamilton College.

Back in 2018, entire generations of Americans had never really experienced high inflation. It was one of those mythical things from decades past, like print newspapers or civil political discourse. 

So when Trump floated his first-term tariffs, consumers and businesses didn’t really expect inflation to rise above the 2% or so they were used to. 

Now though, after four years of paying through the nose for eggs?  

“So if you are paying attention to any discussion about the impact of tariffs, certainly inflation is a word that you’re going to be sensitive to, and that’s going to influence your expectations about inflation,” Owen said. 

Higher inflation expectations can cause higher inflation, a self-fulfilling nightmare for the Fed. 

Richard Clarida, Fed vice chair in 2018, said consistently low inflation allowed the central bank to basically ignore Trump’s tariffs as one-off shocks. 

Although those 2018 tariffs were also smaller in scope. 

“Right now, there’s a discussion about Mexico and Canada, and potentially the eurozone and reciprocal tariffs,” Clarida said. “So the menu of possible tariff options is vastly longer.”

On the other side of the Fed’s dual mandate, full employment, the 2018 and 2025 economies look similarly strong, with unemployment around 4%.

But over the past few months, payroll numbers and gross domestic product show signs of a slowdown. 

This time around, tariffs are hitting an economy that’s losing momentum, said Stephanie Aliaga at J.P. Morgan Asset Management.

“The economy the 2025 Fed is trying to steer is a far more fragile economy than the one that they encountered in 2019, and given the risks with inflation and growth, it puts the Fed in a really tricky spot,” Aliaga said. 

Either keep rates high to fight the inflationary impact of tariffs and risk recession, or lower rates and risk more inflation.