Newly elected President Donald Trump has caused headaches for the Federal Reserve before he even took office.
Inflation, part of the Fed double mandate Maintaining price stability with maximum employment remained a challenge in 2024, with price increases approaching (but not exceeding) the Fed’s inflation target of 2%.
And Fed officials have only grown more concerned that their years-long struggle to reduce inflation will hit more stumbling blocks near the finish line.
According to the minutes of the Fed’s latest policy meeting published earlier this month, “nearly all participants assessed that upside risks to the inflation outlook had increased,” citing recent “stronger-than-expected data on inflation and the likely effects of potential changes in trade and immigration policies.”
Trump’s proposed policies, such as high tariffs on imported goods, tax cuts for businesses and curbs on immigration, are seen as inflationary. And that policy could further complicate the central bank’s stance on interest rates.
According to updated economic forecasts from the Fed’s Summary of Economic Projections (SEP) published in December, the central bank expects core inflation to reach 2.5% next year, higher than the previous projection of 2.2%, before cooling to 2.2% in 2026 and 2% in 2027.
Tariffs are 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 tariffs special circumstancesand Trump has promised to do that.
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% duties on both Mexico and Canada.
Read more: How do rates work and who actually pays them?
‘Our starting point is that we will receive rates [in 2025]“But they are starting relatively low and targeted,” Deutsche Bank chief economist Matthew Luzzetti told Yahoo Finance, predicting a cumulative 20% increase in rates for China, along with more targeted levies for Europe.
Luzzetti does not anticipate the universal basic rate that Trump has threatened, but does foresee continued persistent inflation. That’s why he implemented zero Federal Reserve interest rate cuts this year.
Fed Governor Michelle Bowman earlier this month became the latest central bank official to share the same view on rate cuts in 2025.
But instead of citing tariffs as a potential challenge to inflation, Bowman sees another path for Trump-related economic shifts to maintain upward pressure on prices.