Trump’s Trade War Raises Bar for Fed Rate Cuts

• April 7, 2025Updated 7:59 a.m. ET

President Trump’s global trade war has significantly raised the bar for the Federal Reserve to lower interest rates, as tariffs risk worsening an already knotty inflation problem while also damaging growth.

Jerome H. Powell, the Fed chair, drove home that message in a hotly anticipated speech that came at the end of a turbulent week as financial markets melted down after Mr. Trump’s tariff plans were revealed.

The measures would lead to higher inflation and slower growth than initially expected, Mr. Powell warned during an event in Arlington, Va., on Friday. He showed concern about the souring economic outlook, but his emphasis on the potential inflationary effect of the new tariffs made clear that it was a significant source of angst.

“Our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem,” Mr. Powell said. The Fed’s mandate includes two goals, fostering a healthy labor market and maintaining low, stable inflation.

Before Mr. Trump’s return to the White House, inflation was already proving to be stubbornly sticky, staying well above the Fed’s 2 percent target. Yet the economy had stayed remarkably resilient, leading the central bank to adopt a more gradual approach to interest rate cuts that culminated in it pausing reductions in January. At that policy meeting, Mr. Powell established that the Fed would need to see “real progress on inflation or, alternatively, some weakness in the labor market” to restart cuts.

But with inflation set to soar because of tariffs, it will take tangible evidence that the economy is weakening significantly to get the central bank going again. That could mean that rate cuts are pushed off until much later this year or even delayed until next year if that deterioration takes time to materialize.