President-elect Donald Trump has already caused headaches for the Federal Reserve even before he took office.
Inflation, which is part of the Fed's dual mission of maintaining price stability and maximizing employment, will remain a challenge throughout 2024, with price increases approaching (but not breaching) the Fed's 2% inflation target.
Fed officials are increasingly concerned that their years-long effort to lower inflation will hit further stumbling blocks near the finish line.
According to the minutes of the Fed's latest policy meeting, released earlier this month, "nearly all participants agreed that upside risks to the inflation outlook have increased," citing recent "stronger-than-expected inflation data and the possible impact of potential changes in inflation." Trade and immigration policy. "
Trump's proposed policies, such as high tariffs on imported goods, tax cuts for businesses and restrictions on immigration, are seen as inflationary. These policies could further complicate the central bank's interest rate path.
According to the latest economic forecasts from the Fed's Summary of Economic Projections (SEP) released in December, the central bank expects core inflation to reach 2.5% next year, up from its previous forecast of 2.2%, before cooling to 2.2% in 2026 and 2.0% in 2026. %. 2027.
Tariffs have been one of Trump's most talked about campaign promises.
In the United States, tariffs are usually set by Congress, but the president has the power to impose certain tariffs in special circumstances, and Trump has vowed to do so.
The president-elect has pledged to impose comprehensive tariffs of at least 10% on all trading partners, including 60% tariffs on Chinese imports and 25% tariffs on Mexico and Canada.
Read more: How do tariffs work and who actually pays them?
"Our baseline is that tariffs will indeed be imposed (in 2025), but the starting tariffs will be relatively low and targeted," Deutsche Bank chief economist Matthew Luzzetti told Yahoo Finance. In addition to more In addition to targeted levies, tariffs on China are expected to rise by a cumulative 20% on Europe.
Luzetti did not foresee the widespread benchmark tariffs Trump threatened, but he did foresee persistent sticky inflation. For that reason, he supported the Fed's move to zero interest rates this year.
Earlier this month, Federal Reserve Governor Michelle Bowman became the latest central banker to share her view on a rate cut in 2025.
But rather than viewing tariffs as a potential inflationary challenge, Bowman sees another avenue for Trump-related economic shifts to keep upward pressure on prices.
"Pent-up demand may be released after the election, especially as consumer and business confidence improves, which may also bring inflationary risks," Bowman said in a speech on January 9. Progress in eliminating inflation may continue to stall. risk. "
In other words, if consumers and businesses increase spending and investment in response to Trump's pro-business policies, "animal spirits" could push the economy to grow faster and keep inflation high.
Goldman Sachs equity strategist David Kostin wrote in a note last month that after Trump's victory, investors were optimistic that "'animal spirits' would spark an acceleration in business activity, spurring another surge in activity." One animal—the bull—goes on.”
This optimism has led to expectations for fewer rate cuts so far in 2025, leading to middling stock market performance.
As Costin warns, "Whether this new enthusiasm is necessary remains to be determined."
alexandra canal is a senior reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.
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