Fed’s Stance on Interest Rates Amid Tariff Uncertainty

By Howard Schneider

PALO ALTO (Reuters) – The Federal Reserve shouldn’t commit to further interest rate cuts until it’s clear if the Trump administration’s tariffs will cause persistent inflation or just a temporary price adjustment, said St. Louis Fed President Alberto Musalem on Friday.

Musalem indicated he sees equal chances for both inflation scenarios. The tariffs could lead to a one-off price increase, similar to a tax effect; however, following recent high inflation, the impact could be more lasting, especially as new levies affect intermediate goods.

He urged caution in conclusions.

The Fed reduced its policy rate by one percentage point last year but hasn’t acted since December. With the Trump administration’s tariff policies introducing potential new price pressures, Musalem stated, “It’s possible that higher inflation will be brief and mainly concentrated in the latter half of 2025, as businesses deplete inventories and apply tariffs on new goods as one-off price increases. Conversely, inflation could be more lasting.”

He warned against prematurely addressing the impact of tariffs or easing policy, as it risks underestimating inflation’s intensity and duration, which could negatively affect inflation and employment outcomes for the public.

Still, he suggested that rate cuts could be suitable if tariffs persist but inflation remains brief, expectations are anchored, and economic activity slows significantly.

However, numerous issues remain uncertain. The Trump administration has yet to finalize the tariff schedule, and this situation might linger for months.

Simultaneously, while confidence among businesses and households is declining, economic data on employment and inflation have not significantly changed in response to the administration’s trade policies.

This rationale supported the Fed’s unanimous decision to hold rates steady in the current 4.25% to 4.5% range, as officials noted the difficulty in deciding on future policy shifts until a range of administration policies are finalized and their economic impacts are understood.