Fed Officials Are Bracing For Higher Inflation, Slower Growth From Tariffs

The U.S. economy is in for higher inflation and slower growth as President Donald Trump’s trade war heats up, officials at the Federal Reserve said this week.

Central bankers are in the same boat as other experts: waiting to see how the trade wars unfold. Several Fed officials said they expect consumer prices to rise and economic growth to slow, worsening the outlook for both sides of the Fed’s “dual mandate” to keep inflation low and employment high.

Susan Collins, president of the Federal Reserve Bank of Boston, spoke with Yahoo! Finance Friday. She said she expects inflation of “well over 3%” this year. That would be a setback, considering the Fed’s goal is to get inflation to a 2% annual rate, as measured by core Personal Consumption Expenditures. Core PCE increased 2.8% over the year in February.

In a separate interview with the Financial Times, Collins said the central bank “would absolutely be prepared” to stabilize financial markets if they became disorderly. Stocks and bond prices have swung wildly in recent days in response to Trump’s steep tariffs and his subsequent announcement on Wednesday that he would pause most of them for 90 days.

Alberto Musalem, president of the St. Louis Fed, said the central bank could use its monetary policy to “lean against” tariff-driven price increases. Speaking at a bankers’ convention in Arkansas on Friday, Musalem said he was skeptical of the “textbook” view that the Fed should ignore tariff-driven price increases because they are, in theory, one-time events.

Musalem acknowledged high inflation and a slower economy would put the Fed in a “challenging” position.

The Federal Reserve’s main tool to fight inflation and keep the labor market afloat is changing the federal funds rate, which influences borrowing costs on all kinds of loans. The Fed can lower the rate to boost the economy with easy money, preventing unemployment. Or, it can raise the rate to reduce borrowing and inflation by allowing supply and demand to rebalance.

But it can’t do both at the same time. The Fed has kept its rate high in recent months to smother out the last embers of the post-pandemic surge of inflation, which has come down considerably since 2022 but is still more than the Fed’s 2% annual target.

Austan Goolsbee, president of the Chicago Fed, said the tariffs were likely to cause inflation and economic stagnation at the same time, an economic condition known as “stagflation.”

“Prices are going up while jobs are being lost and growth is coming down,” Goolsbee said at the Economic Club of New York Thursday. “There is not a generic playbook for how the central bank should respond to a stagflationary shock.”

Jeff Schmid, president of the Federal Reserve Bank of Kansas City, said he would prioritize fighting inflation if the Fed were forced to choose between keeping price increases in check and preserving the labor market.

“There is a growing possibility that in setting policy, the Fed will have to balance inflation risks against growth and employment concerns,” Schmid said in a speech to business leaders in Kansas City on Thursday. “When contemplating this balance, I intend to keep my eye squarely focused on the outlook for inflation.”