The Fed expects tariffs to drive up prices

Federal Reserve (Fed) officials said yesterday that the rise in prices is due to increased tariffs on U.S. imports and advised patience before making any decisions on interest rates before it is clear whether the inflationary shock will be fleeting or more persistent.

“One thing we've heard is that much of the impact of the tariffs to date hasn't yet been reflected in the numbers. There's been a lot of anticipation, inventory building, and all that sort of thing, and more and more companies are telling us that those strategies are starting to run out of steam,” said Atlanta Fed President Raphael Bostic.

"If these pre-tariff strategies have run their course, we're about to see some price changes, and then we'll learn how consumers are going to respond to that," said Bostic, who now believes the Fed will have to wait longer to gain clarity on the direction of the economy and make any changes to interest rates.

"We need to wait and see where the economy goes before doing anything definitive," said Bostic, who anticipates only a quarter-point cut in the Fed's policy rate this year and several months in the red, waiting for the impact of the Trump administration's policies to become clear.

“I think the best thing we can do is sit down and take a hard look at the data, talk to our communities, listen to what they're thinking and the decisions they're making, and see how it all comes together,” Cleveland Fed President Beth Hammack said at an Atlanta Fed event. Her counterpart, San Francisco President Mary Daly, echoed her comments in a joint appearance.

So far, the main impact appears to be from confidence surveys, which show that households and businesses are less confident about the economic outlook and expect higher inflation.

In a speech to the Economic Club of Minnesota, St. Louis Fed President Alberto Musalem said the central bank must first guard against rising inflation expectations, and that the key to that effort will be assessing whether upcoming price increases appear to be one-time increases or risk becoming more persistent.

The tariff plans may have been scaled back, but they still “appear likely to have a significant impact on the near-term economic outlook,” Musalem noted, with “direct one-time effects on the prices of imported final goods, indirect effects on the prices of domestically produced goods and services, and possibly second-round effects on inflation.”