The Federal Reserve should be wary of persistent inflation driven by tariffs

Fed chief Mousalem said he was watching closely to see if the rise in short-term inflation expectations would trickle down into longer-term expectations, which could make fighting inflation more difficult and reduce the Fed's flexibility to respond to labour market weakness. He noted that there was a high degree of uncertainty about the effect and timing of tariffs and other new policies, and that there was a "clear possibility" that inflation would pick up again even if the job market weakened. He said the Fed's policy was well-positioned and should remain vigilant. "I am cautious about the assumption that'the impact of higher tariffs on inflation will be short-lived or limited, '" he said. " I think it is appropriate to'hedge 'against second-round effects through monetary policy, although in practice it can be challenging to distinguish between the direct, indirect and second-round effects of underlying inflation and tariffs. "