Fed Officials' Tariff Concerns Put Rate Cuts on Hold

The Federal Reserve (Fed) has expressed concerns about the potential impact of President Donald Trump's tariffs on inflation, leading officials to put rate cuts on hold for the time being. According to the minutes of the Fed's January 28-29 meeting, officials noted that the proposed tariffs and mass deportations of migrants, along with strong consumer spending, could push inflation higher this year. As a result, the Fed decided to keep its key policy rate unchanged at 4.3%, after cutting it from a two-decade high of 5.3% late last year.



The Fed's pause in rate cuts makes it less likely that borrowing costs for consumers, including for mortgages, auto loans, and credit cards, will decline anytime soon. However, recent data suggests that inflation may be getting worse, leading many economists to forecast just one, if any, rate cut this year. Consumer prices rose 3% in January from a year ago, up from a 3 1/2 year low of 2.4% last September. The Fed, however, more closely follows a separate inflation measure that shows inflation is closer to 2.5%.



Fed officials cited a "high degree of uncertainty" surrounding the economy, which made it appropriate for the central bank to take a careful approach in considering any further changes to its key interest rate. All of the Fed's policymakers supported keeping its key rate unchanged last month, signaling a growing disagreement between those officials who supported further rate reductions and those more worried about stubborn inflation.

In recent days, multiple central bank policymakers have noted the uncertainty surrounding President Trump's desire to slap broad-ranging duties on products from Canada, Mexico, and China, as well as the potential impact on inflation. Any indication that the tariffs are presenting longer-lasting pressure in prices could make the Fed hold interest rates higher for longer.



Chicago Fed President Austan Goolsbee cited a number of supply chain threats that include "large tariffs and the potential for an escalating trade war." He noted that if inflation rises or progress stalls in 2025, the Fed will be in the difficult position of trying to figure out if the inflation is coming from overheating or if it's coming from tariffs. That distinction will be critical for deciding when or even if the Fed should act.

In conclusion, the Fed's concerns about tariffs' impact on inflation have led officials to put rate cuts on hold for the time being. As the situation surrounding President Trump's tariffs and their potential impact on inflation becomes clearer, the Fed will continue to monitor the evolving set of economic conditions and adjust its policy accordingly.