The Federal Reserve is bracing for tougher trade-offs as President Trump’s economic agenda, including tariffs and spending cuts, risks stoking inflation while denting growth. Economists warn that this combination could lead to a harder decision point for the central bank, making it challenging to balance its goals of low and stable inflation with a healthy labor market.
The Fed has been relatively straightforward in setting interest rates since the pandemic, as its goals were not in conflict with each other. However, with Trump’s economic agenda, officials may face an uncomfortable dilemma between safeguarding the economy by lowering rates and staving off price increases by keeping rates high or raising them further.
Fed Chair Jerome Powell indicated little concern about this dilemma but warned that “further progress may be delayed” on getting inflation back to the 2% target due to tariffs. Economists, including Nela Richardson at ADP, are sounding the alarm, saying they are getting to a harder decision point for the Fed.
The US economy is unlikely to experience stagflation, but economists are skeptical about dismissing the possibility of real tensions between the Fed’s goals. Michael Gapen at Morgan Stanley noted that Powell appeared “very complacent” and expressed concerns that there may be misplaced confidence around inflation.
The Fed’s new projections show officials prepared to look through tariff-induced price pressures, which they expect will lift their preferred inflation measure to 2.8% by the end of the year. However, this has raised questions about how much stock to put in the more benign scenario financial markets are pinning their hopes on.
Source: https://www.nytimes.com/2025/03/20/business/fed-trump-tariffs-inflation.html