By AP Economics Writer Christopher Al Gerber
WASHINGTON (AP) — The Federal Reserve could not change key rates for more months to assess the impact of tariffs on President Donald Trump’s widespread tariff employment and inflation, even as the White House pushes for interest rate cuts.
The Fed will almost certainly not change that rate when it closes its latest policy meeting on Wednesday. Chair Jerome Powell and other Fed officials have shown they want to see how their duties, including 145% of all imports from China, affect consumer prices and the economy.
Central bank attention could lead to more conflict between the Fed and the Trump administration. On Sunday, Trump once again urged the Fed to cut fees in a TV interview, with Powell saying “I don’t like me because I think he’s totally tough.” So far inflation is from the Fed’s 2% target for now, Trump and Treasury Secretary Scott Bescent have allegedly claim the Fed can lower that rate. The Fed pushed it high in 2022 and 2023 to combat inflation.
If the Fed is cut, it can reduce other borrowing costs, such as mortgages, car loans, and credit cards, but it is not guaranteed.
Trump also said on Sunday he would not fire Powell. But if the economy stumbles in the coming months, Trump could renew his threat to eliminate Powell.
The big question facing the Fed is how tariffs affect inflation. Almost every economist and Fed official expects import taxes to raise prices, but for how long or how long it is not clear. Tariffs usually cause a one-off rise in prices, but not necessarily ongoing inflation. But if Trump announced further tariffs as he threatened to do it on drugs, semiconductors and copper, or if Americans are worried about inflation getting worse, they can increase prices in a more sustained way.
Chief economist nationwide, Kathy Bossjeansick said this will allow the Fed to remain on the sidelines until September.
“It’s hard for them to cut faster because they have to measure, what is the impact of inflation?” Bostjancic said. “Is this somewhat sustainable and adds to the expectations of inflation?”
Economists and the Fed are closely watching inflation expectations. This is essentially a measure of the amount of consumers who are concerned about worsening inflation. Higher inflation expectations can self-fulfill. Because Americans believe prices will rise, they can take measures to boost costs, such as seeking higher wages.
For now, the US economy is almost in a solid form, with inflation being quite chilled since its peak in 2022. Consumers spend at a healthy pace, but some of this may reflect something like a car before the tariffs. Companies are still adding workers at a steady pace, and unemployment is low.
Still, there are signs that inflation will worsen in the coming months. Research from both manufacturers and services companies shows that higher prices are being seen from suppliers. A survey by the Federal Reserve Dallas branch also found that almost 55% of manufacturers expect to take over the impact of increased tariffs on their customers.
“The bottom line means that inflation will rise significantly over the next six months,” said Torsten Slok, chief economist for the Apollo Group, in an email.
However, tariffs can sometimes be heavy on the economy, especially due to the uncertainty they create. The enormous tariffs from around 60 other countries announced on April 2 were subsequently postponed until July 9th, but could be reimposed. Business research shows that companies are postponing investment decisions until they become more clear.
Ryan Sweet, chief economist at Oxford Economics, said the uncertainty surrounding trade policy would give him “night horror.”
“The economy of uncertainty is absolutely choking,” Sweet said. “Businesses who don’t know the rules of the road, the reaction to their knees is to sit in their hands. That’s what they do.”
But as uncertainty slows employment, slows the economy, and boosts unemployment rates, the Fed could soon move towards interest rate cuts. Economists say a sharp economic slowdown could ultimately cool inflation.
“If you feel like the economy is really slowing down, I think it will probably be prioritized (beyond inflation), and usually the committee will drag it somewhat.
In March, the Fed signaled that it could cut its fees twice this year. But since then, the Trump administration has imposed a duty that Powell said last month was bigger and wider than the Fed expected.
The Fed can preemptively lower the fare to prevent slowing. But with such a big tariff in place, Powell shows he wants to see how the Fed will affect inflation before it moves.
“Without price stability, we cannot achieve a long term period of a strong labor market that benefits all Americans,” Powell said.
Original issue: May 7, 2025, 7:26am EDT
