As President Trump moves forward with his plans to reshape the global trade landscape through extensive tariffs, Federal Reserve officials are grappling with a pressing question: how will these policies influence the central bank’s strategy to reduce interest rates?
A key Fed governor voiced his opinion on Monday, expressing confidence that Trump’s approach won’t throw a wrench in the Fed’s plans to rein in inflation. He even hinted that further rate cuts could be on the horizon this year.
“My basic perspective is that any introduction of tariffs will lead to only a slight and non-durable increase in prices,” shared Christopher J. Waller during a speech in Australia on Monday evening. “Thus, I favor disregarding these effects as much as possible when formulating monetary policy.”
There is concern among economists that tariffs—felt as additional costs by American consumers—could push prices higher in the U.S. temporarily and eventually dampen economic growth.
Waller noted the potential for a larger-than-anticipated economic impact depending on how tariffs are structured and implemented. However, he suggested that the price increases caused by tariffs could be mitigated by other policies which might produce “positive supply effects and alleviate inflation.”
Given Waller’s role as one of the seven members on the Board of Governors, where he votes on every policy decision, his opinions carry significant weight.
President Trump has also emphasized domestic energy production, deregulation, and tax cuts as key aspects of his economic strategy. Additionally, his administration is pursuing mass deportations of illegal immigrants and aiming to trim government spending by reducing the federal workforce.
So far, Fed officials have been cautious about predicting how these policy changes could affect the economy and, subsequently, interest rates. Borrowing costs currently sit between 4.25% and 4.5%, after the Fed decided to hold off on further cuts last month until they were more confident in stabilizing inflation.
The last significant trade tension the Fed had to navigate was the tariff battle during Trump’s first presidential term in 2018. However, that period contrasts sharply with today’s economic environment.
Back then, inflation was subdued, consistently falling short of the Fed’s 2% target, and interest rates were notably lower at around 2%. With growth forecasts looking bleak due to businesses scaling back investments, the Fed had the leeway to act preemptively, reducing rates by three-quarters of a percentage point by the end of 2019 to stave off a larger economic downturn.
A similar “looking through” approach might apply now if fears of economic growth being stifled by tariffs outweigh what could be a short-lived spike in consumer prices. However, consumers are still jittery from the worst inflation shock in about four decades, complicating the central bank’s decision-making.
Unwelcome inflation news surfaced last week with the latest Consumer Price Index, showing a rise in price pressures in January. The main culprits were increased grocery prices, driven by a 15% rise in egg prices due to a bird flu outbreak, along with rising energy costs.
Even after excluding these volatile items, the so-called “core” inflation surged at its fastest monthly pace in about two years.
Relief came with the Producer Price Index, reflecting what companies pay for goods and services, suggesting the overall inflation measured by the Fed’s favored Personal Consumption Expenditures index was less alarming than feared.
Waller described the data as “mildly disappointing,” noting that inflation remained considerably above the Fed’s target, with progress toward that goal moving “painfully slow.”
He also cautioned against drawing firm conclusions from the latest figures. Consumer price growth often peaks at the start of the year before easing in the second half, a pattern Waller and other economists attribute to seasonal factors that might distort the actual trend.
Research from the Fed indicates this pattern has occurred 16 out of the last 22 years. In a separate speech, Patrick Harker, president of the Federal Reserve Bank of Philadelphia, pointed out that January’s CPI inflation has outstripped expectations nine times over the past decade.
“If this early-year stagnation in progress is temporary, as it was last year, further policy easing may be warranted,” Waller remarked. “But until that determination is clear, I advocate maintaining the policy rate as is.”
Michelle Bowman, another Fed governor, echoed a need for a “cautious and gradual” approach to any additional rate cuts, while awaiting further evidence of inflation slowing—a view prevalent among many central bank officials.
Bowman emphasized the importance of having “clarity” on the Trump administration’s plans.
“It’s crucial to gain a clearer understanding of these policies, their implementation, and to build greater confidence in how the economy will react in the near future,” she stated. Like Waller, Bowman was appointed by Trump during his initial term.
The president and his advisors have taken a more cautious tone about their ability to control inflation, moving away from earlier promises to tackle it immediately.
Kevin Hassett, director of Trump’s National Economic Council, told CBS News that the administration has a “multifaceted plan to end inflation,” highlighting tax cuts, spending reduction efforts championed by entrepreneur Elon Musk, deregulation, and ramped-up energy production.
Nevertheless, investors have lowered expectations for significant Fed rate cuts this year, with worries that Trump’s policies might collectively drive inflation higher. Futures markets now suggest a mere quarter-point rate cut by December.
Harker expressed optimism that inflation will wane over time, allowing for future rate reductions.
“That doesn’t mean we don’t have areas to watch,” he commented. “In reality, what’s certain is the presence of many uncertainties.”
