"Fed Messenger": Tariffs become key factor in whether and when the Fed resumes rate cuts

As Mr. Trump considers using tariffs more boldly, a key question looms over the Fed, writes Nick Timiraos, the "Fed mouthpiece": how much will any price increases stimulate public expectations of higher inflation? When or whether the Fed resumes rate cuts depends largely on the inflation outlook, which in turn may depend on whether Mr. Trump follows through on his threat to raise tariffs. The trade war escalated during Mr. Trump's first presidency, with the Fed cutting interest rates in 2019. The Fed is concerned that the impact of the trade war on business sentiment and investment could overwhelm the potential impact of higher prices from tariffs. The effect of tariffs on economic activity at the time "was not inflationary because it was not an inflationary period," said Steven Kamin, then the head of the Fed's international finance department and now at the American Enterprise Institute. The Fed is likely to react differently this time after the tariff hikes take effect because the United States has just gone through a period of great inflation. He predicted that the Fed would "really be more opposed to tariffs in this round than in the previous round," and that if the tariff policy is enacted, the Fed will maintain interest rates at higher levels than before.