Trump’s Tariffs May Complicate Efforts to Tame Inflation

Federal Reserve officials are keeping close tabs on the tariffs the Trump administration announced Saturday, given the expectation that such policies could lead to higher prices, at least temporarily.

The central bank is especially wary after wrestling with a surge in prices following the pandemic. Inflation has eased back down toward the Fed’s 2 percent target after it raised interest rates aggressively in recent years and kept them at high levels, but central bankers remain alert to anything that could stall progress toward that goal.

The Fed has historically tended to look past or not react to changes in trade policy, considering them one-off adjustments in prices rather than potential sources of persistent inflation. Tariffs tend to dent growth in the longer run as well, as businesses retrench and consumers offset rising prices in certain goods by cutting back on spending in other areas.

In 2019, those dynamics prompted the Fed to lower interest rates as a pre-emptive move against a weakening economy. Officials now are grappling with whether to use that playbook once again.

Austan Goolsbee, the president of the Chicago Fed and a voting member on this year’s policy-setting committee, articulated the dilemma on Friday, just days after the Fed put further interest rate cuts on ice as it adopted a wait-and-see approach until it had more clarity on Mr. Trump’s plans.

“The difficulty we’re going to have here, in this near period, is if collectively policy is going to be raising prices, we’re going to have to figure out which part of the inflation is the part that monetary policy should look through and which part is a sign of the economy,” he said in an interview with CNBC.

“Our signal is getting a little muddied, when things are happening that drive up prices.”