Federal Reserve leaders are becoming increasingly cautious as new U.S. tariff policies under President Donald Trump raise concerns about a potential resurgence in inflation. The Fed has sent strong signals that it intends to keep interest rates unchanged, as price pressures begin to intensify.
During a speech at the Economic Club of New York on June 6, Fed Governor Adriana Kugler warned:
“I currently see greater risk of inflation increasing, while the risks of a slowdown in job and output growth remain present. Therefore, I continue to support holding the current policy interest rate steady as long as these inflation risks persist.”
Kansas City Fed President Jeff Schmid also emphasized the need for heightened alertness regarding inflation risks from tariffs. “Although tariffs may push prices higher, the scale of that increase is still uncertain and will become clearer over time,” he said.
The Fed is scheduled to meet on June 17–18, and most analysts forecast that interest rates will remain on hold. After reducing rates by a total of 1 percentage point at the end of 2024, the Fed has refrained from adjusting policy during 2025 due to persistent uncertainties surrounding President Trump’s economic agenda.
Kugler affirmed: “Our current monetary policy stance is well-positioned to respond to any macroeconomic changes that may arise.”
Policy Divide Within the Fed
There is now a clear divergence of views within the Federal Reserve. One group supports maintaining elevated interest rates for longer to “look through” the short-term inflation caused by tariffs, while another believes the Fed should be prepared to cut rates if recessionary risks increase.
Several members of the Federal Open Market Committee (FOMC) have warned that inflation resulting from tariffs could be more persistent and drawn out than expected, requiring continued policy restraint. Others argue the impact may be transitory and should not be overemphasized when assessing long-term inflation trends.
Philadelphia Fed President Patrick Harker, in his final address before retiring at the end of the month, took a cautious stance:
“We don’t yet have a clear view of how recent trade and economic policy priorities from Washington will ultimately impact inflation and employment. What I’m watching most closely now is the effect of tariffs.”
Harker noted that the Fed may soon face a difficult situation of rising inflationary pressure alongside an increasing unemployment rate.
Could Tariff-Driven Inflation Persist?
Kugler projected that newly imposed tariffs in 2025 would continue to drive inflation higher. Citing internal Fed research, she stated that the 20% tariff on Chinese goods implemented earlier this year has already added 0.2 percentage points to core PCE inflation. Given that current tariff levels have surpassed 20% and now affect a wider range of countries, “the impact will be larger and likely more enduring.”
She outlined three main channels through which tariffs may extend inflationary pressure:
Short-term inflation expectations among businesses and consumers may rise, creating room for broader price hikes.
Opportunistic price increases by firms, using tariff-related costs as justification for raising prices across untaxed products.
Input cost pass-through, where higher costs for imported components and materials drive up final product prices, leading to “second-round” inflation.
Additionally, reduced production efficiency due to higher input costs could further elevate price levels.
Real-World Data and Market Expectations
Business and consumer surveys from May showed a clear uptick in both short- and long-term inflation expectations. Notably, the University of Michigan’s consumer survey revealed a marked increase in short-term expectations. Still, Kugler noted that long-term expectations remain relatively stable.
While the U.S. labor market continues to appear strong, Kugler cautioned that changes in trade policy could eventually lead to higher unemployment.
The Fed’s Beige Book for May signaled signs of economic slowdown, although official macro data still points to overall stability.
President Schmid of the Kansas City Fed added that, in theory, the central bank can “look through” temporary price spikes from tariffs, provided long-term inflation expectations are well anchored. Still, he warned against complacency:
“Although recent inflation readings have not spiked, the effects of tariffs will likely become more apparent in the coming months.”
Schmid remained optimistic that the U.S. economy could maintain growth momentum, supported by a robust labor market, rising wages, and steady consumer spending.
Philadelphia Fed President Harker concluded:
“The U.S. economy remains fundamentally strong, with no major cracks appearing just yet — but the pressures and risks are clearly growing.”
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