Will Tariffs Keep the Federal Reserve From Cutting Interest Rates This Year?

Like everyone else, officials at the Federal Reserve are watching and waiting to see what tariffs President Donald Trump will impose and what effect they’ll have on the economy.

Trump on Monday delayed 25% tariffs on Canada and Mexico for a month but is still planning to enforce a 10% tariff on imports from China starting Tuesday. Federal Reserve officials, in their most recent meeting, pumped the brakes on easing monetary policy in part because of the uncertainties around potential tariffs and their economic impacts.

It seems that Monday’s actions have not given officials any more clarity on whether they will cut rates. Two Fed policymakers noted the inflation risks of Trump’s tariffs in separate remarks Monday.

“What we’re seeing this morning does really highlight that there’s a lot of uncertainty about how policies unfold. And without knowing what actual policy will be implemented, it’s just really not possible to be too precise about what the likely impacts are going to be,” said Susan Collins, president of the Federal Reserve Bank of Boston, in an interview on CNBC.

Inflation Running Above Fed’s Target

The looming trade war comes at a time when Fed officials are trying to subdue the last remnants of the post-pandemic surge of inflation. As of December, inflation was still running higher than the Fed’s target of a 2% annual rate. In January, Fed officials held the central bank’s benchmark interest rate at an elevated level, keeping upward pressure on all kinds of loans, to discourage borrowing and spending and prevent inflation from flaring up again.

Any setbacks in the battle against inflation could make the Fed keep interest rates higher for longer or even raise them again. However, Collins said the Fed might not necessarily raise rates in response to an uptick in prices from the tariffs if it did not lead to a sustained acceleration of consumer prices, and if consumers did not start to expect higher inflation.

Consumer Inflation Expectations are Important

Fed officials have often said consumer inflation expectations can be a self-fulfilling prophecy because people can ramp up spending when they expect prices to go up, which can itself create demand and drive prices up.

Raphael Bostic, president of the Federal Reserve Bank of Atlanta, made similar comments to reporters after a speech at the Rotary Club of Atlanta, according to a report from Bloomberg. He said the Fed would likely hold interest rates steady while gauging the impact of the tariffs in the coming months.

“There’s a state of play where you might look through the tariff and not have it be a major driver for policy, but again, that depends,” Bostic told Bloomberg. “To the extent that were to impact things like inflation expectations—I think it would be appropriate to respond with policy in some way.”