President-elect Donald Trump gave the Federal Reserve a headache before he even took office.
Inflation, part of the Fed double mandate maintaining price stability while maximizing employment remains a challenge through 2024, with price increases approaching but not exceeding the Fed’s 2% inflation target.
And Fed officials have only grown more concerned that their years-long fight to reduce inflation will hit further stumbling blocks near the finish line.
According to minutes from the Fed’s last policy meeting published earlier this month, “nearly all participants assessed that risks to inflation 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 high tariffs on imported goods, corporate tax cuts and immigration restrictions, are considered inflationary. And those policies could further complicate it the central bank’s path forward for interest rates.
According to updated economic forecasts from the Fed’s Summary of Economic Projections (SEP) released in December, the central bank expects core inflation to reach 2.5% next year, up from a previous projection of 2.2%, before cooling to 2 .2% in 2026 and 2% in 2027.
There were tariffs one of the most talked about Trump’s campaign promises.
In the United States, Congress usually sets tariffs, but the president has the power to impose certain sub special circumstancesand Trump has promised to do so.
The president-elect has promised to impose blanket tariffs of at least 10% on all trading partners, including 60% tariffs on imports from China and 25% levies on Mexico and Canada.
Read more: How do tariffs work and who actually pays them?
“Our basis is that we get tariffs [in 2025]but they’re starting relatively low and targeted,” Deutsche Bank chief economist Matthew Luzzetti told Yahoo Finance, predicting a 20% cumulative increase in tariffs for China, with more targeted levies for Europe.
Luzzetti doesn’t foresee the universal core tariffs that Trump has threatened, but he does foresee sticky inflation continuing. For this reason, this year he pledged to cut the interest rate by the Federal Reserve.
Fed Governor Michelle Bowman became the central bank’s newest official earlier this month share the same view rate cuts in 2025.
But instead of citing tariffs as a potential challenge to inflation, Bowman sees another avenue for Trump-related economic moves to keep pressure on prices.
