[Federal Reserve officials have been successful in setting interest rates to minimize inflation and maximize employment, but the task has become more complicated since President Donald Trump took office. The tariffs Trump has vowed to levy on America’s biggest trading partners could lead to more inflation, some economists predict. The February 1 deadline for tariffs on Mexican and Canadian goods and all Chinese goods looms, which could increase US consumer prices for a wide range of goods. Many economists believe Trump’s threats are a negotiating tactic, which could result in watered-down tariffs or no tariffs at all. However, the range of possible outcomes makes it difficult for Fed staff to make economic forecasts that inform interest rate decisions.
The Fed’s December 2024 meeting summary noted the uncertainty surrounding Trump’s policies, including trade, immigration, and fiscal policies, and how they may affect the economy. The staff highlighted the difficulty in selecting and assessing the importance of these factors for the baseline projection and featured alternative scenarios. Some Fed officials are already making forecasts that take into account potential tariffs, while others are waiting for Trump to sign new laws into effect.
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