President-elect Donald Trump gave the Federal Reserve a headache before he even took office.
Inflation, part of the Federal Reserve Dual mandate Maintaining price stability with maximum employment remained a challenge throughout 2024, with price increases approaching, but not exceeding, the Fed’s 2% inflation target.
Fed officials are becoming more concerned that their years-long struggle to lower inflation will run into more hurdles near the finish line.
According to Minutes of the Federal Reserve’s latest policy meeting Released earlier this month, “nearly all respondents viewed upside risks to the inflation outlook as having increased,” citing “stronger-than-expected recent readings on inflation and the potential impacts of potential changes in trade and immigration policy.”
The policies Trump proposes, such as high tariffs on imported goods, corporate tax cuts, and restrictions on immigration, are seen as inflationary. These policies could further complicate the central bank’s path forward regarding interest rates.
According to updated economic forecasts from the Fed’s Summary of Economic Prospects (SEP) published in December, the central bank expects core inflation to reach 2.5% next year, higher than its previous forecast of 2.2%, before cooling to 2.2% in In 2026 and 2%. In 2027.
Tariffs were one of Trump’s most talked-about campaign promises.
In the United States, tariffs are usually set by Congress, but the president has the authority to impose certain tariffs Special circumstancesTrump has pledged to do so.
The president-elect pledged to impose comprehensive tariffs of at least 10% on all trading partners, including a 60% tariff on Chinese imports and 25% duties on both Mexico and Canada.
Read more: How do tariffs work, and who really pays them?
“Our bottom line is we get tariffs [in 2025]We expect a 20% cumulative increase in tariffs on China, as well as more targeted tariffs on Europe, but they start relatively low and targeted, Matthew Luzetti, chief economist at Deutsche Bank, told Yahoo Finance.
Luzetti does not expect the global base tariffs that Trump threatened, but he expects steady inflation to continue. For this reason, he agreed to cut interest rates to zero from the Federal Reserve this year.
Fed Governor Michelle Bowman earlier this month became the latest central bank official to share the same view on interest rate cuts in 2025.
But rather than pointing to tariffs as a potential challenge to inflation, Bowman sees another path for Trump-related economic shifts to continue upward pressure on prices.