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Key Takeaways
- Officials at the Federal Reserve have become more cautious about cutting interest rates because of uncertainty about President-elect Donald Trump’s plans to impose tariffs on trading partners.
- The Fed has been keeping rates high to contain inflation, and some central bankers see a risk that tariffs will push consumer prices higher.
- The President-elect clashed with Fed Chair Jerome Powell in the former’s first term because Trump thought interest rates were too high.
President-elect Donald Trump says he loves low interest rates, but his talk of imposing tariffs is pressuring the Federal Reserve to keep rates higher for longer, especially with post-pandemic inflation still stubborn.
The Federal Reserve cut its benchmark interest rate by a quarter-point Wednesday. However, central bankers scaled back their expectations for lowering it even further in 2025. That’s partly because officials are uncertain about how the tariffs Trump recently promised to impose.
Fed chair Jerome Powell said at a press conference following the interest rate decision that some central bankers factored in the uncertainty around how tariffs will be implemented or how they’ll affect inflation and the economy when making their predictions this week.
“It’s kind of common sense thinking that when the path is uncertain, you go a little bit slower,” Powell said. “It’s not unlike driving on a foggy night or walking into a dark room full of furniture; you just slow down.”
Federal Reserve Wary of Reigniting Inflation
Trump recently said he would impose tariffs on Canada, Mexico, and China, America’s top trading partners.
Economists widely believe imposing import taxes stokes inflation because merchants pass on higher costs to customers. However, they’re less certain about how much tariffs contribute to inflation.
Fed officials are likely worried about tariffs’ inflationary effects because they still haven’t fully quashed the inflation that started in the wake of pandemic shutdowns. While inflation has come a long way from the highs experienced in the summer of 2022, it has remained stubbornly above the Fed’s goal of a 2% annual rate.
Because of the risks of tariffs reigniting inflation, the Fed has scaled back its expectations for the year ahead. On average, Fed officials predict they will cut the fed funds rate twice in 2025 rather than the four cuts they had anticipated in September.
Fed Officials Await More Details
Trump has yet to lay out important details of his tariff plan, and some financial market participants are betting that tariff threats will mostly be used to win trade concessions rather than be implemented.
“We just don’t know really very much at all about the actual policy,” Powell said. “It’s very premature to try to make any kind of conclusion. We don’t know what will be tariffed from what countries, for how long, in what size. We don’t know whether there will be retaliatory tariffs.”
Trump and Powell have clashed over interest rates. During Trump’s first presidency, Trump threatened to fire Powell for keeping rates too high. Powell’s term extends to 2026, and Trump earlier this month said he said he wouldn’t try to replace him before that.
