President Donald Trump’s tariff policy will likely raise costs for consumers and businesses, but its overall effect on the U.S. economy remains uncertain, which is why the Federal Reserve will continue its wait-and-see approach to adjusting monetary policy, two Fed officials said April 3.
“In my view, there is no need to be in a hurry to make further policy rate adjustments,” Fed Vice Chair Philip N. Jefferson said at an event at the Federal Reserve Bank of Atlanta. “The current policy stance is well positioned to deal with the risks and uncertainties that we face in pursuing both sides of our dual mandate,” he added, referencing stable prices and maximum employment.
The day before, Trump unveiled sweeping tariffs that included, among other things, a minimum baseline of 10% tariffs on all countries and 25% tariffs on automobiles imported from other nations.
“Tariff-related price increases and rising inflation expectations could argue for maintaining a restrictive stance for longer to reduce the risk of unanchored inflation expectations.” said Fed Governor Lisa D. Cook during a speech at the University of Pittsburgh. “But these price increases also lower disposable personal income, which could lead to lower consumer spending. And the uncertainty related to tariffs, by stalling hiring and investment, could generate a negative growth impulse to the economy and a weaker labor market.”
Because of that uncertainty, Cook said, “It will be appropriate to maintain the policy rate at its current level while continuing to vigilantly monitor developments that could change the outlook.”
The Fed on March 19 held interest rates steady for the second straight meeting, leaving the federal funds rate unchanged at a range of 4.25% to 4.5%.
Core personal consumption expenditures, or core PCE, the Fed’s preferred inflation gauge, rose 2.8% year-over-year in February, up from the 2.7% year-over-year increase in January.
When asked about the new tariff policy’s impact on the Fed, Jefferson said it’ll be one part of the central bank’s assessment, which also includes immigration policy, regulatory policy and other financial policies coming out of Washington.
“This level of uncertainty, of course, can weigh on households and businesses’ investment and spending decisions,” he added. “So we’re in a situation where it’s going to be important to take our time and think carefully about their impact.”
He added, “Because of our mandate to focus at the aggregate level on the labor market and price stability, it’s really the net effect of a whole collection of policies that are most important for my thinking about the conduct of monetary policy.”
The Fed’s next meeting is May 6-7. Market participants predict there is a 79% chance the committee will holds rates steady at that meeting, according to the CME FedWatch Tool that tracks trading in the 30-day fed funds futures.
