Federal Reserve Officials Weigh Impact of Inflation and Trade Policies on Interest Rates

Three Federal Reserve officials, who usually have different opinions like cats and dogs, surprisingly sang the same tune on Thursday: the U.S. inflation is cooling down, making it likely for the central bank to dish out some interest rate cuts. But, hold onto your hats, because President Donald Trump's trade, immigration, and other policies are like a wild card that could flip the script.

Atlanta Fed President Raphael Bostic, not one to sugarcoat things, said he's expecting two quarter-percentage-point rate 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." Basically, it’s like predicting the weather in a hurricane.

Bostic, who doesn’t have a vote in the Fed's rate-setting committee this year, told reporters he didn’t think a new inflation storm was brewing in the U.S. economy. He pointed out that the 4% unemployment rate is as healthy as a horse. However, businesses are feeling both excited and like they're walking on eggshells about how new import taxes, immigration rules, and regulation changes will play out.

Since taking office on January 20, Trump has been a one-man fireworks show, threatening tariffs on goods from major U.S. trading partners like China, Mexico, and Canada.

"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." Translation: If prices go up, they’ll just pass the buck—or the bill—to us.

Inflation is sticking around like gum on a shoe, and reaching the Fed's 2% target is bumpier than a rollercoaster ride. Consumer prices jumped 3% on a year-over-year basis in January, the fastest since last June.

The Fed kept its benchmark interest rate in the 4.25%-4.50% range at a policy meeting last month and is expected to do the same at its March 18-19 gathering, as officials wait for a crystal ball to see how the administration’s new policies affect the economy. Financial markets are now betting on just one Fed rate cut this year.

NEAR-TERM INFLATION EXPECTATIONS

St. Louis Fed President Alberto Musalem thinks the upcoming policy shifts are like adding hot sauce to a dish—it could make inflation stall above the central bank's 2% target, or even rise higher. This could force the Fed to sit tight for longer, and in a worst-case scenario, if the job market also takes a nap, they might have to choose between fighting inflation with higher rates or giving the economy a soft pillow with easier policy.

Musalem, speaking to the Economic Club of New York, didn’t spell out his expectations for rate cuts this year, but he did say the policy rate should be reduced once "inflation convergence" to the Fed's 2% goal is like a done deal.

"Market and some survey measures indicate that near-term expectations of inflation have risen notably over the past three months," Musalem said. If inflation gets stuck at current above-target levels or expectations rise, "a more restrictive path of monetary policy relative to the baseline path might be appropriate." In other words, they might have to tighten the screws.

Chicago Fed President Austan Goolsbee, usually the peace-loving dove among the Fed's policymakers, said that before all the recent policy and geopolitical hoopla, overall inflation "looked pretty good" and was down substantially from its mid-2022 peak. The tariffs Trump imposed during his first term didn’t really mess with inflation, Goolsbee said, partly because they were narrow enough that supply chains just shrugged them off.

But when considering the more widespread and hefty tariffs Trump is cooking up, "it 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."