Tariffs May Keep Inflation Pressures Elevated
Raphael Bostic, President of the Federal Reserve Bank of Atlanta, has warned that the price increases driven by tariffs could be gradual and persistent rather than a one-time shock, which will keep upward pressure on U.S. inflation. In a public speech on Monday, Bostic stated that the impact of tariffs has already permeated consumer and business expectations, potentially leading to more frequent future price adjustments.
"The risks have already seeped into the psyche of consumers and business leaders." Bostic pointed out that companies are already passing tariff costs through price increases, and surveys by the Atlanta Fed suggest future price hikes are just a matter of time, rather than if they will happen.
Internal Fed Split on Rate Cuts and Inflation Outlook
Recently, there has been a noticeable split among Federal Reserve officials regarding the impact of tariffs on inflation and the timing of rate cuts. At this month's policy meeting, 10 officials leaned towards ignoring the short-term price effects of tariffs, expecting at least two rate cuts this year; however, 7 other officials believe no rate cuts are necessary this year, fearing tariffs could cause more lasting price pressures.
Fed Governors Waller and Bowman previously hinted that if inflation remains moderate, they would support a rate cut in July; but some officials, including Bostic, are cautious about cutting rates too soon, suggesting rates should remain stable until the fall to observe the inflation impact of tariffs.
Bostic noted that traditional methods of analyzing supply shocks may no longer be applicable, and globalization trends and shifts in production patterns need to be closely watched to assess their potential impact on U.S. inflation and the economy.
Bostic Expects Only One Rate Cut This Year
Contrary to the market's expectations of multiple rate cuts by the Federal Reserve, Bostic stated he anticipates the Fed will only cut rates once in 2025 and three times in 2026, but emphasized that these forecasts are highly uncertain.
Despite the ongoing impact of tariffs, the Fed currently lacks sufficient data to justify an immediate rate adjustment. Bostic stressed that the Fed has "leeway" to wait for more economic data before making any policy shifts.
Robust Labor Market Provides Room for Patience
Bostic reiterated that the strong performance of the U.S. labor market provides the Federal Reserve with room to patiently assess rate cuts. He believes that without the need for further rate hikes, U.S. inflation can eventually return to the 2% target level.
"I believe price increases will continue, and companies will keep passing on tariff costs, but inflation will eventually return to the target level," Bostic stated. The Fed will continue to monitor changes in future economic data, particularly the specific paths and lags of tariffs on price transmission, to judge the future rate cut pace.
Market Focuses on Upcoming Data for Policy Direction
Currently, market investors are closely watching upcoming key economic data on employment and inflation to determine if the Federal Reserve will start a rate cut cycle in July or September as some officials expect, or as per Bostic's view, conduct only one rate cut this year while adopting a watchful stance towards inflation risks.
Amid the interplay of tariffs, inflation, and economic growth slowdown, the Fed's policy path remains highly uncertain, and investors need to pay attention to the impact of tariffs and the Fed's latest statements to gauge future changes in the dollar's trajectory and global market liquidity.
