Federal Reserve Considers Rate Cuts as Tariffs Show Mild Inflation Impact

The Chairman of the Federal Reserve Bank of Chicago recently suggested that the U.S. economy may have never strayed from its "golden path," implying that if recent tariff hikes do not spark significant inflation, the Federal Reserve could resume its rate-cutting cycle. Speaking at a public event in Milwaukee, the Chairman highlighted that inflation data has been stable for the past three months, with no notable upward trends. This stability, he argued, suggests that the economy has maintained a healthy trajectory similar to that before the tariffs were implemented.

The Chairman emphasized that if the impact of the tariffs remains mild, the Federal Reserve should continue with its previous monetary policy path. This statement implies that if inflation remains controlled, the Federal Reserve might resume the rate-cutting cycle that was previously paused. The recent decision by the Federal Reserve to keep interest rates unchanged for the fourth consecutive meeting was influenced by the need to observe the effects of President Trump's policies, particularly the impact of tariffs on consumer prices and the overall economy. The weekend's U.S. airstrike on Iranian nuclear facilities has further heightened market concerns about global economic prospects.

The Chairman also discussed how certain industries are currently "sharing" the cost of tariffs, meaning that the costs are being partially absorbed by suppliers, manufacturers, and consumers rather than being fully passed on to the end market. This observation underscores the Federal Reserve's cautious approach to monetary policy, as it continues to assess the full impact of the tariffs on inflation.

Following the Federal Reserve's rate decision last week, there remains a divide among its officials regarding the future direction of policy. Some officials predict at least two rate cuts of 25 basis points by 2025, while others believe rates should remain unchanged until the end of the year. Several officials have since offered differing views on the timing of potential rate cuts. Those appointed by President Trump have indicated support for rate cuts starting in July if inflation remains moderate. Meanwhile, the President of the Federal Reserve Bank of San Francisco suggested that autumn might be a more appropriate time for such actions.