- Inflation cooled to 2.8% in February, but the impact of Trump’s new tariffs has yet to be felt in consumer prices.
- The Fed faces a tough choice, balancing potential rate cuts with rising inflation risks and economic uncertainty.
- Trump’s trade war escalates, prompting Canada and the EU to retaliate, which could further slow business activity and hiring.
Inflation cooled slightly in February, giving the Federal Reserve some breathing room to consider interest rate cuts by mid-year. But with tariffs escalating and economic uncertainty growing, the path forward remains murky.
Inflation Slows, But Trade War Could Change Everything
Consumer prices rose 2.8% in February compared to last year, improving from January’s 3% reading, according to government data released Wednesday. This progress has fueled optimism that the Fed might ease rates gradually if inflation continues on a downward trajectory.
However, the numbers don’t yet reflect the impact of Trump’s latest tariff hikes. The administration recently doubled tariffs on Chinese imports to 20% and imposed 25% duties on all goods from Canada and Mexico, set to fully take effect by April 2.
“If the Trump administration eases up on tariffs, we could see a ‘good news’ rate cut by June. But if the labor market weakens, the Fed may be forced into a **‘bad news’ cut, regardless of tariffs,” said Krishna Guha of Evercore ISI.
Fed’s Dilemma: Inflation vs. Recession Risks
Fed Chair Jerome Powell has taken a wait-and-see approach, watching how Trump’s economic policies—tariffs, tax cuts, deregulation, and tighter immigration—play out. The Fed is expected to hold rates steady at 4.25%-4.50% at its March 18-19 meeting.
Meanwhile, markets are betting on three quarter-point rate cuts by the end of 2025, starting in June, according to interest-rate futures traders.
Global Retaliation & Inflation Worries
Trump’s new tariffs on steel and aluminum went into effect Wednesday, prompting retaliatory measures from Canada and the EU. Analysts warn that higher prices could hit consumers, even if importers absorb some of the costs.
At the same time, inflation expectations are rising, a troubling sign for the Fed, which fears that if people believe prices will keep rising, it could fuel actual inflation.
Business Slowdown & Recession Concerns Grow
Beyond inflation concerns, businesses are already feeling the pressure from Trump’s unpredictable trade policies. Surveys show that uncertainty is slowing business activity, which could cool the labor market, despite its current strength.
“Tariff uncertainty and price hikes are squeezing consumer spending, dampening corporate sentiment, and delaying hiring,” said ING economists. “If this continues, the risk of a potential recession grows.”
What’s Next? Watching Key Data
Wholesale price data, set to be released Thursday, will offer a deeper look into inflation trends. Some analysts warn that inflation may have worsened in February, based on the details of Wednesday’s consumer price report.
For now, the Fed is caught in a balancing act, weighing inflation control against economic growth risks, while Trump’s trade war adds another layer of unpredictability.
