Investing.com- The Federal Reserve is expected to largely ignore any inflationary effects stemming from tariffs under the Donald Trump administration, as such impacts are viewed as one-time increases in the price level rather than sustained inflationary pressures, Goldman Sachs analysts said in a research note. notes.
However, analysts acknowledged concerns that the tariffs could lead to higher inflation expectations, a development that could limit the Fed’s policy flexibility. Those expectations could become more sensitive given the recent rise in inflation, they said.
Goldman Sachs cited economic studies showing that individuals’ lifetime inflation experiences significant shaping of their inflation expectations. Using data from the University of Michigan Consumer Sentiment Survey, analysts noted that recent experiences with inflation, especially in highly visible areas like gasoline prices, have a large impact on public sentiment.
Based on these findings, analysts predicted that tariffs, in their baseline scenario, would have minimal effects on inflation expectations. Even in a scenario that includes a 10% universal tariff, one-year inflation expectations may rise by 0.5 percentage points, and five-year expectations by only 0.1 percentage point.
However, Goldman Sachs warned that tariffs could have a greater psychological impact if the price generates significant media attention, similar to a spike in gasoline prices. Recent spikes in inflation expectations in Michigan and frequent mentions of tariffs in survey responses suggest such effects are plausible, analysts said.
This heightened public sensitivity to tariff price change may influence policy makers. The Federal Open Market Committee (FOMC) could refrain from cutting rates under such circumstances, while the White House could face pressure to limit further rate hikes, analysts concluded.
