Federal Reserve officials have expressed growing concerns over the potential impact of President Trump's proposed tariffs on inflation, according to recent meeting minutes. Trump has suggested implementing a 25% duty on autos, pharmaceuticals, and semiconductors, which would accelerate throughout the year. While Federal Reserve Chair Jerome Powell has refrained from speculating on these tariffs' effects, the Federal Open Market Committee (FOMC) members have noted the possible consequences on inflation, causing them to pause further interest rate cuts.
The Fed's benchmark overnight borrowing rate is currently targeted between 4.25% and 4.5%. Despite strong consumer demand, which also presents a concern, FOMC members unanimously decided to hold their key policy rate steady. This decision followed three consecutive cuts totaling a full percentage point in 2024. Members emphasized their desire to see inflation decrease further before considering additional reductions in interest rates.
"The effects of potential changes in trade and immigration policy as well as strong consumer demand" were highlighted as significant concerns by FOMC members.
Market pricing suggests that the next interest rate cut might occur in July or September. The FOMC minutes reflected "substantial optimism about the economic outlook," partly due to anticipated easing in government regulations or changes in tax policies. However, the specter of potential tariffs looms large, with business contacts across various Districts indicating that firms would likely pass on higher input costs to consumers if these tariffs are enacted.
FOMC members expressed "substantial optimism about the economic outlook, stemming in part from an expectation of an easing in government regulations or changes in tax policies."
Inflation indicators have shown mixed signals. While consumer prices rose more than expected in January, wholesale prices indicated softer pipeline pressures. The FOMC members agreed it was prudent to assess these evolving economic conditions carefully.
The FOMC members emphasized the need for "time to assess the evolving outlook for economic activity, the labor market, and inflation."
The committee's minutes also cited business contacts' intentions to pass higher input costs on to consumers due to potential tariffs. This admission underscores the broader implications of the proposed duties on various sectors of the economy.
"Business contacts in a number of Districts had indicated that firms would attempt to pass on to consumers higher input costs arising from potential tariffs," according to FOMC members.