Tariffs May Hold Key to Fed's Next Rate Hike Decision

The Federal Reserve raised interest rates for the first time in three years, aiming to combat inflation. However, economists now believe that President Trump's policies may play a significant role in determining whether the central bank raises rates again.

Ryan Young, senior economist at the Competitive Enterprise Institute, suggests that upcoming policy choices on Iran, Canada, and tariffs will have a large impact on the Fed's path forward. He notes that ending the conflict with Iran, resolving the trade war with Canada, and either eliminating or reducing existing tariffs according to a predictable schedule would all lower prices for Americans.

Young estimates that credibly ending the Iran conflict would lead to gradual decreases in energy prices, benefiting the car and construction industries. Reducing or eliminating tariffs would also alleviate another source of upward pressure on prices.

In contrast, Jason Sorens, senior economist at the American Institute for Economic Research, focuses on the supply side of the economy when it comes to inflation. He argues that while the Fed's rate increase may slow economic activity in the short term, economic output should recover and longer-term interest rates, including 10- and 30-year bond yields and mortgage rates, will decrease.

The Federal Reserve Bank of St. Louis calculates that tariffs have contributed between 0.26% and 0.56% to excess core inflation beyond the Fed's 2% target from June 2025 and June 2026.