Since the beginning of the year, Federal Reserve (Fed) officials have been scrambling to figure out how to deal with the next fiscal policy in the wake of President Donald Trump’s aggressive tariff threats.
Some central bank policymakers have recognized that Donald Trump’s desire to impose threats on products from Canada, Mexico, China and Europe could reignite the potential for widespread inflationary effects.
Any indication that prolonged tariff pressure on prices could cause the Fed to hold interest rates higher for longer.
On Wednesday, Chicago Fed President Austan Goolsbee cited the threat to import supply chains affected by large tariffs and the potential for a trade war.
He added that whether inflation rises or stalls in 2025, the Fed will be in a difficult position to try to figure out whether inflation is too ‘hot’ due to tariffs.
On January 29, the Federal Open Market Committee (FOMC), of which Goolsbee is a voting member, supported keeping interest rates in a range of 4.25% to 4.50% as it assessed the evolving set of economic conditions.
The vote came amid a tug-of-war between Trump and U.S. trade partners over the suspension of levies on Canada and Mexico and the continuation of 10% duties on China.
Economists argue that implementing tariffs will only affect prices that affect certain goods and will not affect inflation.
However, in this case Trump cast a wide enough net that it could generate the kind of underlying inflation that the Fed fears.
