Trump makes the Fed’s challenging inflation fight more complicated
President-elect Donald Trump has created a headache for the Federal Reserve before taking office.
Inflation, part of the Fed dual mandate Maintaining price stability at peak employment remains a challenge in 2024 as price increases approach, but do not breach, the Fed’s 2% inflation target.
And Fed officials have only grown more concerned that their years-long battle to bring down inflation will face further setbacks near the finish line.
Agreed minutes from the Fed’s latest policy meeting Published earlier this month, “nearly all participants assessed that upside risks to the inflation forecast have increased,” citing recent “stronger-than-expected inflation readings and the likely effects of potential changes in trade and immigration policies.”
Trump’s proposed policies, such as higher tariffs on imported goods, tax cuts for corporations and curbs on immigration, are seen as inflationary. And that policy can make it more complicated Central bank progress for interest rates.
According to updated economic projections from the Fed’s Summary of Economic Projections (SEP) released in December, the central bank sees core inflation at 2.5% next year, up from a previous forecast of 2.2% before cooling to 2 ,2% in 2026 and 2% in 2027.
Tariffs have been one of the most discussed Trump’s campaign promises.
In the United States, Congress usually sets tariffs, but the president has the power to set specific tariffs special circumstancesand Trump promised to do it.
The president-elect has pledged to impose tariffs of at least 10% on all trading partners, including 60% tariffs on Chinese goods and 25% tariffs on both Mexico and Canada.
Read more. How do tariffs work and who actually pays them?
“Our starting point is that we do get tariffs [in 2025]but they are starting relatively low and targeted,” Matthew Luzetti, chief economist at Deutsche Bank, told Yahoo Finance, predicting a 20% cumulative increase in tariffs on China, in addition to more targeted tariffs on Europe.
Luzetti doesn’t expect the universal base tariff that Trump has threatened, but predicts continued steady inflation, which is why he has cut interest rates to zero this year.
Fed chief Michelle Bowman became the central bank’s latest official earlier this month share that same view reduction of interest rates in 2025
But rather than citing tariffs as a potential inflation challenge, Bowman sees another path to Trump-related economic shifts to keep upward pressure on prices.
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