Federal Reserve officials have expressed concerns that U.S. President Donald Trump’s trade policies could negatively impact economic growth. However, they have signaled that they are unlikely to swiftly implement interest rate cuts, as they expect rising tariffs to lead to increased inflation. The minutes from the Fed’s mid-March meeting highlighted the uncertainty surrounding trade, which could hinder consumer spending and business investment. This caution was noted before Trump’s announcement of expansive tariffs that caused global stock markets to fall and led to rising Treasury yields, raising fears of financial instability.
Following Trump’s recent decision to reduce tariffs on many countries, the stock market experienced a significant relief rally, but this did not provide the clarity that Fed policymakers require to make decisions. Economists at Citi noted that uncertainty regarding trade is likely to continue, as price increases and shifts in business behaviors stemming from previous tariff actions are not easily reversed. Some Fed officials cautioned that rising prices due to tariffs might not be merely temporary, pointing to concerns about enduring inflationary pressures. The Fed is now faced with the challenge of balancing rising inflation against potentially slowing growth, which may lead to higher unemployment.
Policymakers are aware of the difficult trade-offs they face, especially if they aim to counteract inflation while also needing to support job growth. The Fed’s current monetary policy stance is constrained as it navigates these pressures. With no clear path to achieve both stable prices and healthy growth, policymakers anticipate economic growth might drop below trend levels, particularly as households and businesses adapt to new price dynamics. The outlook suggests that while rates have remained steady, future adjustments may depend on how inflation and unemployment evolve in the wake of ongoing trade developments.
Fed officials emphasized caution, weighing the risks of tightening policy amid heightened uncertainty.