President-elect Donald Trump has created a headache for the Federal Reserve even before taking office.
Inflation, part of the Federal Reserve’s dual mandate to maintain price stability with maximum employment, remained a challenge throughout 2024, with price increases approaching (but not exceeding) the 2020 inflation target. % of the Federal Reserve.
And Federal Reserve officials are increasingly concerned that their years-long fight to reduce inflation will run into more obstacles near the goal.
According to minutes from the Federal Reserve’s latest policy meeting released earlier this month, “nearly all participants judged that upside risks to the inflation outlook had increased,” citing recent “stronger-than-expected readings on inflation and the likely effects of possible changes in inflation. trade and immigration policy”.
Trump’s proposed policies, such as high tariffs on imported goods, tax cuts for corporations and restrictions on immigration, are considered inflationary. And those policies could further complicate the central bank’s path forward on interest rates.
According to updated economic forecasts from the Federal Reserve’s Summary of Economic Projections (SEP) released in December, the central bank expects core inflation to reach 2.5% next year, up from its previous projection of 2.2%. before cooling to 2.2% in 2026 and 2% in 2026. in 2027.
Tariffs have been one of the most talked-about promises of Trump’s campaign.
In the United States, Congress typically sets tariffs, but the president has the authority to impose certain tariffs in special circumstances, and Trump has promised to do so.
The president-elect has pledged to impose blanket tariffs of at least 10% on all trading partners, including a 60% tariff on Chinese imports and 25% levies on both Mexico and Canada.
Read more: How do tariffs work and who really pays them?
“Our basis is that we get tariffs [in 2025]but they start relatively low and targeted,” Deutsche Bank chief economist Matthew Luzzetti told Yahoo Finance, projecting a cumulative 20% increase in tariffs on China, in addition to more targeted taxes on Europe.
Luzzetti does not anticipate the universal base tariff that Trump has threatened, but he does foresee persistent and persistent inflation. For that reason, this year he has prepared zero interest rate cuts by the Federal Reserve.
Federal Reserve Governor Michelle Bowman earlier this month became the latest central bank official to share the same view on rate cuts in 2025.
But rather than citing tariffs as a potential inflation challenge, Bowman sees another avenue for Trump-related economic changes to keep upward pressure on prices.