Fed Officials Maintain Cautious Stance Amid Tariff Concerns

Key Findings

* Fed officials express a unified message of caution in response to President Trump's new tariffs.
* Economic theory suggests tariffs could impact inflation, but the extent depends on factors such as supply chain diversification.
* Fed Governor Philip Jefferson emphasizes the need for policy restraint if inflation remains elevated, but suggests rate cuts may be appropriate if the economy weakens or inflation falls faster than expected.
* Atlanta Fed President Raphael Bostic and San Francisco Fed President Mary Daly emphasize the importance of waiting and observing before making policy changes.

Details

Federal Reserve officials have voiced a unified message this week, expressing caution in light of President Trump's recent tariffs. Fed Vice Chair Philip Jefferson advised against rushing to adjust the Fed's stance, while San Francisco Fed President Mary Daly emphasized the need to avoid preemptive actions. Richmond Fed President Tom Barkin echoed this sentiment, urging a wait-and-see approach.

Concerns have arisen among economists that the tariffs could push inflation higher, presenting challenges for the Fed's efforts to bring inflation down to its 2% target. Chicago Fed President Austan Goolsbee highlighted the potential for persistent inflation and the difficulty of distinguishing between price pressures resulting from tariffs or increased demand.

The Fed's cautious stance follows a decision last month to maintain interest rates after three consecutive cuts. President Trump praised the decision as the "right thing to do." The latest data from the Fed's preferred inflation gauge showed that prices remained sticky in the final month of 2024, with the core Personal Consumption Expenditures (PCE) index rising 2.8% year-over-year in December.

Fed officials remain concerned that the tariffs could hinder expectations of rate cuts in 2025. Goolsbee noted that the impact of tariffs on inflation could be larger and longer-lasting compared to the 2018 trade war. The degree to which products can be substituted will determine the extent of the inflationary impact.

Vice Chair Jefferson stated that policy restraint could be maintained if the economy remains strong and inflation continues to decline toward 2%. However, he emphasized the possibility of reducing rates more quickly if the labor market weakens or inflation falls faster than anticipated.

Atlanta Fed President Raphael Bostic and San Francisco Fed President Mary Daly both expressed caution in setting monetary policy, citing the current uncertainty. Bostic emphasized the importance of waiting and observing, while Daly stressed the Fed's ability to take time before adjusting rates, given the solid economic backdrop.