Tariffs, Inflation, and Uncertainty Ahead?

U.S. trade policy returned to the spotlight in February as President Trump advanced his tariff agenda under the “America First” platform. Early in the month, citing national security concerns such as fentanyl smuggling, the President imposed a 10% tariff on all Chinese imports. Additionally, initial tariffs of 25% were placed on imports from Canada and Mexico. However, following negotiations, these were suspended for 30 days, and Canadian energy exports were granted a reduced rate of 10%.

On February 10, President Trump reinstated 25% tariffs on global steel and aluminum imports, aiming to bolster U.S. manufacturing and strengthen national security. More recently, on February 13, he signed a memorandum introducing “reciprocal tariffs,” designed to match duties imposed by trading partners. Implementation of these measures, however, may be delayed until at least April, pending further review by the U.S. Trade Representative.

While the administration asserts that these policies will ultimately strengthen the U.S. economy, market participants exhibit concern over the potential economic repercussions, including retaliatory measures from trading partners and upward pressure on consumer prices. Recent inflation data suggest that progress toward the Federal Reserve’s 2% target has stalled and that shifts in trade policy could exacerbate existing inflationary pressures.

The January Consumer Price Index (CPI) report exceeded expectations, with headline CPI rising 0.5% month-over-month, bringing the annual increase to 3.0% — the highest since June of last year. Core CPI, which excludes food and energy, increased by 0.4% in January, with its 12-month gain reaching 3.3%. Notably, core CPI has remained within the 3.2%–3.3% range for eight consecutive months, highlighting the Fed’s fading progress on inflation.

Federal Reserve officials remain cautious about the broader economic implications of potential trade policy changes. In testimony before the Senate Banking Committee, Federal Reserve Chair Jerome Powell refrained from speculating on the direct impact of tariffs, emphasizing that the Federal Open Market Committee (FOMC) will “react in a thoughtful, sensible way” to achieve its mandate.

The uncertainty surrounding tariffs has introduced notable risks to the economic and market outlook. Inflation expectations — both consumer- and market-based — have risen, and market-implied expectations for Federal Reserve rate cuts have shifted. At the end of September, markets had priced in nearly eight 25-basis-point rate cuts for this year. That expectation has since declined to just two, reflecting evolving inflationary dynamics and monetary policy uncertainty.