The trade war is likely to both depress the economy and boost inflation, requiring different responses from the central bank
by Josh Fellman
Quartz
President Donald Trump’s new tariffs create a dilemma for the Federal Reserve because they’re likely to both increase inflation and slow economic growth — and possibly lead to stagflation.
Economists are split between those who expect policymakers to focus on prices and therefore keep interest rates on hold for an extended period, and those who see the central bank prioritizing full employment and starting to cut borrowing costs.
Citi falls into the latter camp. “Officials will view an increase in inflation due to tariffs as a one-time increase in the price level that can be looked through,” the bank’s economists wrote in a note to clients. “That would leave Fed officials free to respond to softer growth conditions.” It expects 125 basis points of cuts this year, starting as soon as May.