How will tariffs affect inflation in the US? - Fed, concerned about the consequences of Trump's policies
Federal Reserve officials agreed in January that they would need to see inflation decline further before cutting interest rates, but they also expressed concern about the impact that President Donald Trump's tariffs would have on that.
The Federal Open Market Committee decided unanimously at the meeting to keep their base policy rate steady after three consecutive cuts that reached a full percentage point in 2024.
In making the decision, members commented on the potential impacts from the new administration, including tariffs and the impact of reduced regulations and taxes. The committee noted that current policy is “less restrictive” than it had been before the rate cut, giving members time to assess conditions before making any moves.
Members said that the current policy provides “time to assess the evolving outlook for economic activity, the labor market, and inflation, with the vast majority indicating a still-accommodative policy stance. Participants indicated that, provided the economy remained near full employment, they would like to see further progress in inflation before making additional changes to the target range for the federal funds rate.
In comments to reporters, Trump said he was considering 25% tariffs on cars, pharmaceuticals and semiconductors to take effect later this year. While he did not provide details, the tariffs would take trade policy to the next level and pose further threats to prices at a time when inflation has eased but is still above the Fed's 2% target.
Committee members cited “the effects of potential changes in trade and immigration policy, as well as strong consumer demand. Business contacts in a number of districts had indicated that firms would attempt to pass on to consumers higher input costs resulting from potential tariffs.
They further noted upside risks to the inflation outlook. In particular, participants mentioned the potential effects of changes in trade and immigration policy.
In addition to the general focus that Fed officials place on employment and inflation, Trump's plans for fiscal and trade policies have complicated the situation.
Many economists expect the tariffs to worsen inflation, although Fed members have said their response will depend on whether the increases are one-off or if they generate more underlying inflation, which would require a policy response.
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