Federal Reserve keeps US interest rates on hold

Economists and investors will be on the lookout for clues on how the Federal Reserve is thinking about the Trump administration’s aims, particularly plans to impose tariffs on US imports.

“To me, tariffs really are the wild card for macroeconomic policy this year,” said Claudia Sahm, chief economist at New Century Advisors and a former Fed official. “It feels like it’s just outweighing everything else at this point.”

The Fed has faced global trade wars before — including during Donald Trump’s first term in office. However, at that point neither price pressures nor aggregate demand were as strong as now. This time around, the risk is that the impact on inflation is more pronounced — and more enduring.

A definitive response from Fed chair Jay Powell on the impact of tariffs on interest rates as soon as today is unlikely.

Powell said after the central bank’s December vote that there were “many, many factors” determining how levies on US imports would affect consumer prices, and that central bankers would “take our time” and not rush to conclusions.

Some economy watchers anticipated executive orders on day one of Trump’s second term. But at this stage it is still unclear how tough the US president and self-described “tariff man” will be on the US’s trade partners: trade restrictions could constitute a one-off shock, or prove a slow burn, getting steeper by the month — as desired by Treasury secretary Scott Bessent. Both paths have implications for the knock-on impact on consumer prices.