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President-elect Donald Trump has created a headache for the Federal Reserve before he’s even stepped into office.
Inflation, part of the Fed’s dual mandate of maintaining price stability with maximum employment, remained a challenge throughout 2024, with price increases approaching — but not breaching — the Fed’s 2% inflation target.
And Fed officials have only grown more concerned their years-long fight to bring down inflation will hit further stumbling blocks near the finish line.
According to the minutes from the Fed’s latest policy meeting released earlier this month, “almost all participants judged that upside risks to the inflation outlook had increased,” citing recent “stronger-than-expected readings on inflation and the likely effects of potential changes in trade and immigration policy.”
Trump’s proposed policies, such as high tariffs on imported goods, tax cuts for corporations, and curbs on immigration, are seen as inflationary. And those policies could further complicate the central bank’s path forward for interest rates.
According to updated economic forecasts from the Fed’s Summary of Economic Projections (SEP) published in December, the central bank sees core inflation hitting 2.5% next year, higher than its previous projection of 2.2%, before cooling to 2.2% in 2026 and 2% in 2027.
Tariffs have been one of the most talked-about promises of Trump’s campaign.
In the United States, Congress typically sets tariffs, but the president has the authority to impose certain ones under special circumstances, and Trump has vowed to do so.
The president-elect has pledged to impose blanket tariffs of at least 10% on all trading partners, including a 60% tariff on Chinese imports and 25% levies on both Mexico and Canada.
Read more: How do tariffs work, and who really pays them?
“Our baseline is that we do get tariffs [in 2025], but they start relatively low and targeted,” Deutsche Bank chief economist Matthew Luzzetti told Yahoo Finance, projecting a 20% cumulative rise in tariffs on China, in addition to more targeted levies on Europe.
Luzzetti does not anticipate the universal baseline tariff that Trump has threatened, but does foresee continued sticky inflation. For that reason, he has baked in zero interest rate cuts from the Federal Reserve this year.
Fed governor Michelle Bowman earlier this month became the latest central bank official to share that same view of rate cuts in 2025.
But rather than citing tariffs as a potential inflation challenge, Bowman sees another path for Trump-related economic shifts to keep upward pressure on prices.
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