President Trump’s plans risk stoking inflation and denting growth, an undesirable combination that economists warn could lead to much tougher trade-offs for the central bank.
When inflation was too high and the economy was resilient in the aftermath of the pandemic, the Federal Reserve’s decision to sharply raise interest rates beginning in 2022 seemed like a no-brainer. The same was true just over two years later when inflation had fallen sharply from its recent peak and the labor market had started to cool off. That paved the way for the central bank to lower borrowing costs by a percentage point in 2024.
What made those decisions relatively straightforward was the fact that the Fed’s goals of achieving low and stable inflation and a healthy labor market were not in conflict with each other. Officials did not have to choose between safeguarding the economy by lowering rates and staving off price increases by either keeping rates high or raising them further.
Economists worry that could soon change. President Trump’s economic agenda of tariffs, spending cuts and mass deportations risks stoking inflation while simultaneously denting growth, an undesirable combination that could lead to much tougher trade-offs for the Fed.
“We’re getting to a harder decision point for the Fed,” said Nela Richardson, chief economist at ADP, the payroll processing company.
Jerome H. Powell, the Fed chair, indicated little concern about this dilemma on Wednesday after the Fed’s decision to keep interest rates unchanged for a second-straight meeting in light of a highly “uncertain” economic outlook.
Mr. Powell did warn that “further progress may be delayed” on getting inflation back to the central bank’s 2 percent target because of tariffs. A combination of rising inflation and weaker growth would be “a very challenging situation for any central bank,” he conceded, but it was not one the Fed currently found itself in.