Fed’s Tightrope: Balancing Inflation and Growth Amid Tariffs

Federal Reserve policymakers face a dilemma as tariffs threaten to increase inflation and dampen economic growth. This tense situation, exacerbated by paused but steep tariffs by the Trump administration, compels difficult trade-offs in potentially adjusting interest rates without destabilizing the economy further.

Federal Reserve officials are grappling with the potential impact of widespread tariffs announced last month, which could bring heightened inflation and weaker hiring. According to minutes from the March meeting, the Fed might keep interest rates the same if inflation stays high or cut them if growth wanes and unemployment rises.

The minutes, unveiled Wednesday, highlight a complex scenario where the Fed could face tough decisions, should rising inflation and higher unemployment coincide. Slashing rates typically combats unemployment-driven recessions, but elevated inflation could deter such a measure.

Before President Trump's announcement of sweeping tariffs on April 2, business uncertainty had already led to hiring pauses and price increases. Fed Chair Jerome Powell indicated these tariffs might further escalate inflation, although he suggested such effects might be temporary.

(With inputs from agencies.)