On March 18, 2024, the Federal Open Market Committee (FOMC) decided to keep the federal funds rate stable, ending the sequence of three consecutive cuts of 0.25 percentage points. This decision occurs in a scenario where inflation, especially measured by the core Personal Consumption Expenditures Price Index, remains high, with significant effects on the market and monetary policy in the United States.
The Federal Reserve (Fed) Chair, Jerome Powell, attributes this persistent inflation mainly to the tariffs imposed during Donald Trump’s administration. According to Powell, tariffs on imported products directly impacted goods prices, which remain elevated, while inflation in services shows signs of decline. Thus, the Fed acknowledges that controlling inflation in goods is crucial for effective progress in price stability.
The situation is also worsened by the surge in oil prices, as a result of the start of the conflict in Iran on February 28, 2024. The increase in oil costs raises transportation expenses for consumers and businesses, further pressuring final prices. This combination of tariffs and rising fuel prices creates additional challenges for the monetary policy adopted by the Fed.
Additionally, a study released in December 2024 by the New York Fed indicated that the tariffs imposed on China between 2018 and 2019 caused reductions in employment, productivity, sales, and profits of American companies until 2021. In other words, these measures not only influenced inflation but also negatively impacted the competitiveness and economic health of various sectors in the country.
Tariffs on essential inputs, such as steel, increased production costs within the United States, making it harder for local industries to operate. With higher costs, companies face greater pressure to pass prices on to consumers, a factor that keeps inflation high and limits the Fed’s room to cut interest rates to stimulate the economy. Consequently, the tariff dynamics create a dilemma between curbing inflation and avoiding economic weakening.
In the financial market, Fed decisions and the inflationary scenario have been causing volatility. The Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite recently experienced declines motivated by uncertainties in both monetary policy and the continuation of trade disputes. Overall, these indexes reflect a challenging environment for investors, who observe the direct impact of tariffs and inflation on the performance of listed companies.
On the other hand, it is important to remember that the permanent 21% cuts in the corporate tax rate, promoted by the Tax Cuts and Jobs Act, stimulated the market before the adoption of tariffs. This contributed to the American stock market recording significant rises, of at least 16% in six of the seven years prior to 2023. However, the rise of tariff policy during the Trump administration became an important obstacle to the continuation of this growth cycle driven by interest rate reductions.
Thus, the high inflation of goods associated with elevated tariffs creates a complex environment for the Federal Reserve to decide on the future of interest rates. While inflation in services shows signs of retreat, the high cost of goods maintains pressure for the maintenance or even increase of rates. This situation makes monetary easing difficult, possibly slowing the stock market’s response to future stimuli.
The conclusion of the process still depends on the Federal Reserve’s ongoing analysis, which will carefully monitor the effects of tariffs and inflation on the American economy in the coming weeks. Furthermore, the Fed will assess the impact of the Middle East conflict on oil prices and global costs, elements that will influence future decisions in the United States’ monetary policy.
