The trouble with tariffs: What you think about prices matters to the Fed

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Subscribe to enjoy similar stories. Fed officials closely monitor inflation expectations, captured from both consumer surveys and market-based measures. A key question looms over the Federal Reserve as President Trump contemplates bolder uses for tariffs in his second term: How much would any price increases fuel expectations of higher inflation by the broader public? The Fed is widely expected to hold its benchmark interest rate steady at its two-day meeting that concludes Wednesday, taking a pause after cutting short-term rates by a full percentage point at its last three meetings.

Since officials first cut rates in September, inflation has made uneven progress toward the central bank’s 2% goal. The labor market, meanwhile, has expanded steadily, dousing fears of a sudden weakening that flared last summer. When or whether the Fed resumes cuts rests in large part on the outlook for inflation which, in turn, could be shaped this year by whether Trump follows through on threats to raise tariffs.

Last week, Trump said he was considering whether to impose higher duties on imports from Canada and Mexico by this Saturday. Tariffs remain a key wild card for the Fed’s outlook because of concerns over how they could influence businesses’ and consumers’ expectations of future inflation. To be sure, the Fed ended up lowering rates in 2019 when Trump escalated a trade war the first time he was president.

Fed Chair Jerome Powell and his colleagues feared the hit to business sentiment and investment from a trade war might swamp potential effects of higher prices from tariffs. A television station broadcasting December remarks from Fed Chair Jerome Powell on to the floor of the New York Stock Exchange. Those tariffs were relatively