Boston Federal Reserve Report: Trump's Tariff Policy May Intensify Inflationary Pressures in the U.S

According to a report released by the Boston Federal Reserve Bank on Thursday, the comprehensive tariff measures proposed by the Trump administration could exert further upward pressure on already high inflation levels. If these tariffs take effect, the pressure on the Federal Reserve to control inflation will significantly increase.

According to research from the Boston Fed, the Trump administration originally planned to impose a 25% import tariff on Mexico and Canada, and a 10% tariff on China. The report estimates that this series of tariff measures could lead to an additional 0.8 percentage point increase in the Federal Reserve's preferred inflation measure—the Personal Consumption Expenditures Price Index (PCE).

This will pose a severe challenge for the Federal Reserve. Although the Fed hopes that inflationary pressures will gradually ease, as of December 2023, the overall PCE index has increased by 2.6% year-on-year, while the core PCE index, excluding food and energy, has risen by 2.8% year-on-year, both exceeding the Fed's 2% inflation target. If the tariffs take effect, inflation may rise further, impacting the Fed's monetary policy decisions.

Boston Fed President Susan Collins stated in a television interview on Monday that broad tariff policies will inevitably drive up the prices of goods and services in the United States. She pointed out that tariffs not only lead to higher prices for final consumer goods but also affect the costs of intermediate products, thereby impacting the entire supply chain.

This view aligns with the general consensus in the economics community. Tariffs are essentially a form of import tax, and the ultimate costs are typically borne by American consumers and businesses. When the cost of imports rises for businesses, they often choose to pass those costs onto consumers, thereby driving up inflation.

In the face of inflation uncertainty, the Federal Reserve paused its previous rate-cutting cycle at the end of January this year. In 2024, the Fed had cumulatively cut rates by 1 percentage point, but in light of the impending implementation of the Trump administration's new trade policy, policymakers chose to wait and assess the development of the economic situation.

Fed officials have stated that they are still waiting for further clarification on the Trump administration's trade policy. Trump's economic agenda heavily relies on aggressive trade protectionism and tends to use tariffs as a primary economic tool. However, under the uncertainty of policy, the Fed will be more cautious in formulating future interest rate policies.

It is worth noting that the Trump administration's original plan to impose a 25% tariff on Canada and Mexico was temporarily shelved on Monday, and it remains unclear whether it will be reinstated in the future. The Boston Fed's report is based on tariffs that have been announced but not fully implemented, so the actual future impact on inflation remains uncertain.

The report also notes that the analysis assumes that businesses will fully pass on the tariff costs to consumers, but in reality, some inflationary pressures may be offset by other economic factors. For example, trading partners may take countermeasures, and global and domestic monetary policies may also suppress economic growth, thereby partially alleviating upward inflationary pressures