WASHINGTON – The Federal Reserve (The Fed) is facing a significant dilemma due to President Donald Trump’s tariff policies, which have been criticised as chaotic and uncoordinated.

Two articles by Nick Timiraos in The Wall Street Journal illustrate how these tariffs are creating economic uncertainty, making it more challenging for The Fed to set interest rates.

This situation has led to what is described as a “lose-lose scenario,” where The Fed must choose between cutting rates too quickly, which risks fuelling inflation, or waiting too long, which could cause the economy to slow down or even fall into recession.

Amid this turbulence, the risk of stagflation—a combination of high inflation and low economic growth—has become increasingly evident, largely due to rising production costs and supply chain disruptions caused by import tariffs.

During this week’s two-day policy meeting, The Fed is expected to hold interest rates steady, while continuing to monitor the impact of tariffs on inflation and the labour market.

Fed Chair Jerome Powell has emphasised that they will act cautiously, and a decision to cut rates will only be made if there is clear evidence of economic slowdown, particularly from employment data.

Some central bank officials are choosing to be patient, as they remain concerned about lingering inflation and uncertainty over how consumers and businesses will react to tariffs.

However, others worry that economic downturns could deepen if The Fed is too slow to respond.

Internal tensions have begun to surface within The Fed over whether rising prices are temporary or persistent, and whether avoiding recession or maintaining credibility as an inflation watchdog should take priority.

Richard Clarida, former Fed Vice Chair, has stated that The Fed will not act based on predictions this time, but will instead require concrete evidence of economic slowdown—particularly from the labour sector—before lowering rates.

In other words, The Fed is working to avoid past mistakes, such as underestimating post-pandemic inflation. If public expectations regarding price stability remain intact, The Fed could have more flexibility to manoeuvre. However, if they falter, interest rates may need to be held higher for longer—even as economic growth begins to weaken. (EF/LM)