President-elect Donald Trump has created a headache for the Federal Reserve before he’s even stepped into office.
Inflation, a part of the Fed’s dual mandate of maintaining price stability with maximum employment, remained a challenge throughout 2024, with price increases approaching — but not breaching — the Fed’s 2% inflation goal.
And Fed officials have only grown more concerned their years-long fight to bring down inflation will hit further hindrances near the finish line.
In line with the minutes from the Fed’s latest policy meeting released earlier this month, “just about all participants judged that upside risks to the inflation outlook had increased,” citing recent “stronger-than-expected readings on inflation and the likely effects of potential changes in trade and immigration policy.”
Trump’s proposed policies, equivalent to high tariffs on imported goods, tax cuts for firms, and curbs on immigration, are seen as inflationary. And people policies could further complicate the central bank’s path forward for rates of interest.
In line with updated economic forecasts from the Fed’s Summary of Economic Projections (SEP) published in December, the central bank sees core inflation hitting 2.5% next yr, higher than its previous projection of two.2%, before cooling to 2.2% in 2026 and a couple of% in 2027.
Tariffs have been one of the crucial talked-about guarantees of Trump’s campaign.
In the USA, Congress typically sets tariffs, however the president has the authority to impose certain ones under special circumstances, and Trump has vowed to achieve this.
The president-elect has pledged to impose blanket tariffs of not less than 10% on all trading partners, including a 60% tariff on Chinese imports and 25% levies on each Mexico and Canada.
Read more: How do tariffs work, and who really pays them?
“Our baseline is that we do get tariffs [in 2025], but they begin relatively low and targeted,” Deutsche Bank chief economist Matthew Luzzetti told Yahoo Finance, projecting a 20% cumulative rise in tariffs on China, along with more targeted levies on Europe.
Luzzetti doesn’t anticipate the universal baseline tariff that Trump has threatened, but does foresee continued sticky inflation. For that reason, he has baked in zero rate of interest cuts from the Federal Reserve this yr.
Fed governor Michelle Bowman earlier this month became the newest central bank official to share that very same view of rate cuts in 2025.
But quite than citing tariffs as a possible inflation challenge, Bowman sees one other path for Trump-related economic shifts to maintain upward pressure on prices.