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The American Federal Reserve is divided on the potential inflationary consequences of the tariff increases promised by Donald Trump. While some officials downplay the risks, others fear a resurgence of inflation in an already strained economic context.
A debate that stirs the Fed
It was from the OECD headquarters in Paris that Christopher Waller, a governor of the Fed, spoke on Wednesday, January 8, 2025, about the thorny issue of tariffs. In response to growing market concerns, he attempted to soothe fears by stating that these tariff increases would not have a “significant and lasting effect” on inflation in the United States.
This position contrasts with that of Jerome Powell, the Fed chair, who had expressed his concerns in mid-December about the uncertainties surrounding Trump’s protectionist measures.
“We do not know what will be taxed, coming from which country, and for how long. We do not know either if there will be retaliatory measures or how these taxes will impact consumer prices“, he had detailed at the time.
With inflation currently reaching 2.4% year-on-year, the proposed tariffs – potentially up to 100% on certain Chinese products – could indeed have non-negligible repercussions.
This divergence of opinions within the Fed reflects the difficulty in assessing the real impact of such measures on the American economy. Analysts struggle to precisely measure the cascading effects on supply chains and consumer prices, which further fuels uncertainty.
Financial markets in search of visibility
The uncertainty surrounding future U.S. trade policy is already weighing on stock markets. Investors are particularly concerned about the proposed national economic emergency declaration, revealed by CNN, which would give Donald Trump substantial latitude to impose tariffs.
This prospect directly affects the Fed’s interest rate strategy. After three consecutive cuts, the institution now only anticipates two reductions of 25 basis points for 2025, keeping rates in a range of 4.25% to 4.50%.
Wall Street analysts remain cautious, anticipating a pause in the upcoming end-of-January meeting. This wait-and-see approach reflects concerns about the potential impact of protectionist measures on price stability.
The division within the Fed over the inflationary impact of tariffs illustrates the complexity of the challenge facing the monetary institution. In a context of political transition and economic uncertainty, the Fed will have to navigate carefully between maintaining price stability and supporting growth.
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