Tariffs could factor into Fed's rate-cut plans amid inflation concerns, experts say
A hotter-than-expected inflation report from January and uncertainty over the impact of President Donald Trump's tariff plans on consumer prices could factor into the Federal Reserve's rate-cut decision, expert economists said.
The Labor Department on Wednesday released the consumer price index (CPI) for January, which showed that inflation was 3% on an annual basis, up from 2.9% a month ago, after a larger than anticipated 0.5% monthly increase.
The uptick in inflation comes after the Fed opted against a fourth consecutive interest rate cut at its meeting last month. Uncertainty surrounding Trump's plans for tariffs, which are taxes on imported products, and their implementation timelines could lead to a longer wait for more rate cuts than anticipated.
"Today's data reaffirms Powell's decision to put rate cuts on the back burner for an extended period of time," said Charlie Ripley, senior investment strategist for Allianz Investment Management. "Overall, today's inflation data should force market participants to re-think the Fed's ability to cut rates this year, especially considering the rise in prices is likely unrelated to any tariff activity from the White House."
INFLATION RISES 3% IN JANUARY, HOTTER THAN EXPECTED
Bill Adams, chief economist of Comerica Bank, said that the hot inflation pressure serves as "confirmation that price pressures continue to bubble beneath the economy's surface" and will "reinforce the Fed's inclination to at least slow and possibly even end rate cuts in 2025."
"The Fed is also watching the impact of higher tariffs, more restrictive immigration policies and tax cut plans," Adams added. "These policies could all add to inflation as their effects ripple through the economy, causing the Fed to keep interest rates higher than they would have been under the status quo."
Seema Shah, chief global strategist for Principal Asset Management, said the inflation report "will make for very uncomfortable reading for the Fed" given the price growth and noted that the "government's policy agenda threatens to raise inflation expectations" — a dynamic that could lead to inflation risks becoming "too heavily weighted to the upside to permit the Fed to cut rates at all this year."
EY chief economist Gregory Daco said that his firm's view is that the Fed "will maintain a wait-and-see approach over the coming months" and that he currently sees only two Fed rate cuts in June and December. "The risk is tilted toward less easing if the administration's policy mix fuels inflation and inflation expectations," Daco explained.
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Ryan Sweet, chief U.S. economist at Oxford Economics, noted that the additional tariffs on China and other threatened tariffs have "yet to make their way into the inflation data."
"The Fed's response to tariffs isn't straightforward, but we don't believe tighter monetary policy is likely as it would magnify the drag on the economy from tariffs," Sweet said. "The Fed needs time to gauge how the tariffs are affecting both sides of its dual mandate, keeping it paralyzed until December, when we think its attention will shift from inflation to its full employment mandate, leading to aggressive easing in 2026."
"The monetary policy implications are clear but it's unclear whether the January CPI will give some in the Trump administration pause about moving forward quickly with some of the proposed tariffs. Tariffs can still be used as a bargaining tool to get some concessions from other countries, but the political optics of putting even a little upward pressure on consumer prices via tariffs wouldn't be great for the Trump administration," he explained.
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Federal Reserve Chair Jerome Powell testified before the House Financial Services Committee on Wednesday and was asked about the impact of tariffs on Americans' cost of living and the central bank's efforts to tame inflation, and the chairman noted that the Fed doesn't comment on policy decisions it doesn't have discretion over.
"The Fed has no role in setting tariffs and, you know, we don't comment on decisions made by those who do have that authority," Powell said. "We try to stick to our own knitting. In this particular case, it's possible that the economy would evolve in ways that because of tariffs, or partly because of tariffs, that we would need to do something with our policy rate. But we can't know what that is until we actually know what policies are enacted."