The Federal Reserve Bank of St. Louis President, Alberto Musalem, has raised concerns regarding the impact of tariff policies implemented by the Trump administration on the United States economy. Further imperiling domestic supply, Musalem noted that these tariffs are injecting a layer of uncertainty and worsening inflationary drivers. The US economy is fundamentally strong, though. These policies and policies like them are creating disruptions that are preventing inflation from getting anywhere close to the desired 2% rate. Musalem urged patience with the current policy while the Federal Reserve continues to make an evaluation of the situation.
Tariff policy has increased the risk that inflation will be over 2% on a sustained basis. In reality, it is likely to rise even higher in the coming months. Musalem stressed the need to collect evidence that inflation is on its way back to target before making changes in the stance of monetary policy. The net effect of Trump’s policies on infrastructure is still murky. Yet the tight labor market and increasing second-round effects of tariffs will probably force us to hold interest rates high for longer or at least move in the direction of a more restrictive policy stance.
More ominously, some economists have warned that stagflation – stagnant economic growth along with high inflation – may be worse than projected. They foresee continuing headwinds for the US economy in the months ahead. If inflation expectations begin to rise, the Federal Reserve will need to focus its gaze elsewhere. They will need to do so while reasserting their mandate to fight inflation. The Federal Reserve will continue to have a tough time predicting where the US economy goes next in the midst of heightened economic uncertainty.
In other equally far-reaching news, the Bank of England has now moved to establish the ground for three more cuts to interest rates this year. Inflation in the service sector came in stronger than expected for February. This increase is at least in part thanks to the government plan to raise employer National Insurance. The impact of this tax hike is putting upward inflationary pressure on the services providing further support to rising inflationary pressures.
The Federal Reserve is currently grappling with difficulties in delivering the rate cuts US President Donald Trump has advocated for. It’s no secret that Trump wants lower rates. The economic picture is further complicated by inflationary tariff policies and other inflationary pressures that make it all the more difficult for the Fed to satisfy these calls without compromising its inflation targets.