FOMC First Mentions Impact of Trump Tariffs "Increased Inflation Risk" [Fed Watch]

Jerome Powell, Chairman of the Federal Reserve, speaks at a press conference after the FOMC meeting on December 18 last year. / Washington=Lee Sang-eun, Correspondent

During the Federal Open Market Committee (FOMC) meeting held over two days from December 17 last year, almost all attending members of the Federal Reserve judged that "the upside risk to inflation has increased." Although the name of U.S. President-elect Donald Trump was not directly recorded in the minutes, changes in trade and immigration policies were cited as the cause of this judgment.

According to the minutes of last month's FOMC meeting released by the Fed on the 8th (local time), the vast majority of the 19 members who attended the meeting judged that a 0.25% point rate cut was appropriate. Some members argued that it was time to hold rates steady rather than cut them. The Fed lowered the policy rate by 0.25% points to 4.25~4.5% per annum last month. This was the third rate cut following a 0.5% point rate cut in September, marking a pivot in monetary policy.

However, this downward trend is unlikely to be as fast this year as it was last year. Already at last month's FOMC, attending members expected prices to rise further in the future. They expected the inflation rate to continue to fall towards the 2% target, but stated that the process "may take longer than previously expected."

The minutes introduced the outlook of Fed economists, stating that "economic conditions will remain solid," while mentioning "potential changes in trade, immigration, fiscal, and regulatory policies," noting that uncertainty about the impact of these factors on the economy has increased. Reflecting recent data and preliminary assumptions about potential policy changes due to Trump's inauguration, they predicted that "real economic growth will be slightly lower than previous forecasts, and the unemployment rate will be slightly higher but remain at the natural unemployment level."

Fed economists also saw "the risks around the inflation outlook as tilted to the upside, as core inflation in 2024 did not fall as expected, and the impact of trade policy changes could be greater than staff assumed." This means that Trump's tariffs will eventually push up prices, and the reduction in immigrants could lead to labor shortages, resulting in wage increases.

Members shared this analysis and showed a stance that it was appropriate to slow the pace of monetary policy easing or that they were close to reaching that point. The Wall Street Journal (WSJ) analyzed that participants "feel generally comfortable with holding rates steady at the meeting later this month." The WSJ reported that FOMC members are considering how much more to cut rates, noting the uncertainty about how much potential price pressure remains from the strong inflation figures that appeared last fall, and whether Trump's new tariff promises could further complicate the inflation outlook.

FOMC Minutes

There are somewhat differing positions within the Fed. Tom Barkin, President of the Richmond Fed, noted last week that "there is a risk of inflation exceeding the Fed's target," and stated that "if new tariffs are imposed, price setters may be more willing to pass costs on to consumers."

On the other hand, Christopher Waller, considered a hawk among FOMC members, stated in a speech at the OECD in Paris that if the economy unfolds as expected, he would support continuing to lower the policy rate this year. Regarding the tariff issue, he said, "If tariffs do not have a significant or lasting impact on prices, my view will not be affected."

Washington=Lee Sang-eun, Correspondent selee@hankyung.com