Federal Reserve officials "collectively signal": Beware of tariff inflation risks, not in a hurry to cut interest rates

According to the Zhitong Finance APP, among several Federal Reserve officials who spoke on Friday, none were eager to lower the benchmark interest rate. This is mainly due to economists predicting that the longer the tariffs imposed by Trump, which will take effect mainly in April, last, the more they will drive up consumer prices and hinder job growth, potentially harming the Fed's dual mandate of controlling inflation and maintaining high employment. As the Fed seeks to balance the potential competing dangers of its dual objectives in the future, inaction seems to be the best choice.

The FedWatch tool from the Chicago Mercantile Exchange Group (CME Group) shows that as of Friday, financial markets reflect a 51% probability that the Fed will lower the benchmark interest rate in July, and generally price in three rate cuts of 25 basis points this year. However, the outlook for the economy and interest rates is more uncertain than ever—no one knows exactly how the modern economy and its extremely complex supply chains will respond to the highest tariffs in generations.

St. Louis Fed President James Bullard stated on Friday that the Fed should not commit to further rate cuts until it is clear whether the Trump administration's tariff policies will lead to sustained inflation or a less severe one-time price adjustment. Bullard said he currently sees the possibility of either type of inflation occurring. Theoretically, tariffs should cause prices to spike in a one-time manner, similar to taxation; however, following the recent high inflation, this effect may last longer, and due to new tariffs affecting intermediate goods, this impact may also be more persistent. He said this is a reason not to rush to conclusions.

The Fed lowered its policy rate by a full percentage point last year but has taken no action since December, and the Trump administration's tariff plans now pose a risk of a new round of price pressures.

Bullard stated, “High inflation may be temporary, mainly concentrated in the second half of 2025, as businesses reduce inventories and pass on the tariffs on new goods as a one-time price increase to consumers. It is equally possible that inflation may be more persistent.”

Bullard added, “Committing now to ignore the impact of tariffs on inflation or to ease policy carries the risk of underestimating the level and duration of inflation. A timing misstep in policy shifts regarding inflation and employment outcomes could come at a high cost to the public. If tariffs persist but inflation is temporary, inflation expectations remain stable, and economic activity slows significantly, then rate cuts would still be appropriate.”

Regarding inflation, New York Fed President John Williams emphasized the importance of price stability in the Fed's "dual mandate" during an interview on Friday. Williams said, “One thing we have learned from history is that having good inflation expectations gives the public confidence that no matter what happens today, inflation will return to 2%, and we will ensure that this is very important for price stability. This actually helps strengthen our ability to achieve both of these goals.” But currently, all these issues remain unresolved. The Trump administration has not yet decided what the final tariff timetable will be, and this issue may remain unsolved in the coming months. Meanwhile, despite declining confidence among businesses and households, the economic data on employment and inflation in the U.S. has not yet reacted significantly to Trump's efforts to reshape the global trading system.

This has been one reason supporting the Federal Reserve's decision to keep policy interest rates unchanged, as Fed officials unanimously agreed this week to maintain rates in the current range of 4.25% to 4.5%. Officials generally agree that it is difficult to decide on further policy measures until a series of government policy decisions are finalized and their impact on the economy is clear.

Federal Reserve Chairman Jerome Powell stated that while tariffs could increase the risks of inflation and rising unemployment, it is currently unclear by how much, for how long, and in what sequence they will increase, and the full scope of taxation remains unclear as trade negotiations are ongoing, making it premature to determine how the Fed should respond.

Federal Reserve Governor Lael Brainard stated on Friday that the trade policies being implemented by Trump could suppress U.S. productivity and may require higher interest rates to curb inflation resulting from economic inefficiencies. Brainard noted that the uncertainty surrounding Trump's plans could hinder investment, and rising costs of imported intermediate goods and equipment could delay projects that could otherwise enhance productivity.

Brainard said, "The uncertainty of trade policies may reduce future business investment. Currently, businesses do not know the final levels, rates, or duration of tariffs. Rising costs of imported materials and components may also lead businesses to postpone or scale back their investment plans."

She stated that a reduction in capital investment "could lead to a slowdown in technological innovation and adoption, resulting in overall efficiency decline," while higher trade barriers could "support less efficient companies," diminishing economic competitiveness. Brainard mentioned that supply disruptions could further cause inefficiencies.

She noted that artificial intelligence could enhance productivity, but the ultimate outcome over time remains unclear. She indicated that tariffs themselves could reduce potential output. She stated that just as recent improvements in productivity have helped boost economic growth and lower inflation levels in the U.S., "a decline in potential GDP means a reduction in the economy's softness, which implies increased inflationary pressures," and interest rates may rise.

Cleveland Fed President Loretta Mester also expressed a similar view on Friday. Mester stated that the Fed needs more time to observe how the economy responds to President Trump's tariffs and other policies before determining the correct response, noting that much of the Trump administration's agenda remains unclear.

In an interview, she stated, "There isn't much data from now until June," when the Fed will hold its next interest rate meeting. She elaborated on the Fed's current dilemma. For example, while the latest data shows that the U.S. economy contracted at an annualized rate of 0.3% last quarter, most analysts believe that this is not a clear signal of the economy's direction due to distortions caused by trade policies; in Mester's view, the U.S. economy has remained resilient, and its future direction is still uncertain Similarly, she and other policymakers have also noted the strong momentum in the labor market, with the unemployment rate at a low of 4.2%, but they also acknowledge that the labor market faces risks as businesses begin to consider the impact of new tariff policies. She stated that if the impact of tariffs on boosting prices proves to be limited and the economy weakens, "we want to really focus on employment."

She mentioned that in terms of inflation, tariffs may only prompt a one-time increase in prices. However, she said some businesses have indicated that they plan to make a series of price adjustments over time as they understand the level of import taxes they face—this process itself may last until this summer. Federal Reserve officials are concerned that the longer these issues drag on, the greater the risk of persistent inflation. This necessitates the Fed tightening its policy.

In summary, the uncertainty of government policies "casts a shadow over the outlook, increasing the risks of rising inflation, slowing growth, and a weakening labor market," she said in remarks prepared for a speech at a conference on Friday. "Given the starting point of the economy, inflation remains high, and both sides of our responsibilities are expected to face pressure, so there is ample reason to maintain monetary policy at its currently moderately tight level."

On the same day, Federal Reserve Governor Christopher Waller also stated that due to the continued robustness of the U.S. economy and the rising uncertainty brought by tariffs, current interest rates should remain unchanged. "Overall, the real economy remains healthy, which gives us time to continue addressing inflation and ensure that inflation expectations remain well anchored."

Similarly, Federal Reserve Governor Michael Barr stated on Thursday that the trade policies of the Trump administration could continue to push inflation higher, reduce economic growth, and increase unemployment later this year, which could present policymakers with a tricky decision about which issue to prioritize. However, he added that interest rates are currently at an appropriate level before tariffs have a clearer impact on the economy