A trio of Federal Reserve officials said Thursday that while they still think inflation will cool over time to pave the way for more interest rate cuts as the most likely scenario, uncertainty surrounding President Donald Trump’s trade, immigration and other policies could lead to a different outcome.
Atlanta Fed President Raphael Bostic said that his “baseline expectation” is that central bank policymakers will be able to proceed with two 25 basis point cuts later this year, but “the uncertainty around that is pretty significant… There’s a lot that could happen that could influence that in both directions.”
Bostic isn’t a voting member of the Federal Reserve’s monetary policy-setting committee this year but told reporters he didn’t think the U.S. economy is facing a new burst of inflation and noted that with the unemployment rate at 4%, the labor market is healthy.
However, he added there is both enthusiasm and “widespread apprehension” among businesses about how new import taxes, immigration rules and regulatory changes will impact the economic outlook.
FED MINUTES SHOW TARIFFS FACTORED INTO CONCERNS ABOUT HIGHER INFLATION
President Trump has issued several tariff threats against key trading partners like China, Canada and Mexico since taking office, as well as on imported automobiles, pharmaceuticals and semiconductors.
“In a nutshell, contacts are concerned that tariffs could increase costs,” Bostic said. “Many feel confident that if that happens, then they can pass along higher costs in their prices.”
Stubborn inflation has kept the pace of price growth above the Fed’s 2% target rate. Consumer prices were up 3% on an annual basis in January, which was the fastest pace since last June.
Amid the economic uncertainty, the Fed left its benchmark federal funds rate at a range of 4.25% and 4.5% at its last policy meeting and is expected to do so again at its next meeting on March 18-19 as policymakers look for clarity about the economic impact of Trump’s policies.
HASSETT TO SERVE AS TRUMP ADMIN’S CONTACT WITH THE FED AMID INFLATION FIGHT
St. Louis Fed President Alberto Musalem said in remarks at the Economic Club of New York that the coming policy shifts raise the risk that inflation could stall at a higher rate than the Fed’s 2% target, or move higher.
That would require the central bank to refrain from rate cuts for longer and, in a worst case scenario if the labor market weakens, be forced to choose between fighting inflation with higher rates, or cushioning the economy with easier policy.
“Market and some survey measures indicate that near-term expectations of inflation have risen notable over the past three months,” Musalem said. If inflation sticks at its current above-target levels or those expectations rise, then “a more restrictive path of monetary policy relative to the baseline path might be appropriate.”
TARIFFS COULD FACTOR INTO FED’S RATE-CUT PLANS AMID INFLATION CONCERNS, EXPERTS SAY
Chicago Fed President Austan Goolsbee said that before the uncertainty surrounding economic policy and geopolitics increased, the overall inflation outlook “looked pretty good” compared to its 2022 peak.
He noted that the tariffs imposed by President Trump during his first term didn’t have a material impact on inflation, in part because they were narrowly tailored and included enough exemptions that supply networks weren’t affected.
But with Trump currently developing more broad-based and higher tariffs, Goolsbee said the inflation impact “depends on how many countries they are going to apply to and how big they are going to be. And the more it looks like a COVID-sized shock, the more nervous you should be about that.”
Reuters contributed to this report.
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