Citadel Securities’ Durham Abric says the Federal Reserve’s interest rate trajectory is unlikely to be disrupted by the new Trump administration’s protectionist stance.
“The Fed will likely overlook the impact of tariffs because monetary policy will have little impact on temporary inflation caused by tariffs,” Abric, the firm’s head of U.S. inflation, said in an interview on Wednesday.
Former President Donald Trump, who imposed tariffs on U.S. imports in his first term, has made it clear he will do so again when he takes office in January. While this risks raising consumer prices, Abric said Fed Chairman Jerome Powell and his team will be careful to avoid an overreaction to potentially short-lived economic impacts.
Ultimately, the first-term tariffs would have a limited impact on overall prices, he said. While new tariffs could put temporary pressure on prices, Abric does not believe they will put much pressure on central bank policy.
“Given the Fed’s propensity to cut interest rates, the recent rise in real initial yields may lose steam,” Abric said. “However, longer-term yields could continue to rise in anticipation of stronger growth and continued inflation.”
Future expectations for the Fed’s key interest rate have risen more than future expectations for inflation since mid-September, pushing expectations for the final real interest rate to nearly 1.25%, the highest level since July.
Abric’s comments came after the key inflation Wednesday’s data was in line with estimates, sending Treasury yields lower. Long-term interest rates are still elevated since the November 5 election.
Inflation risk
Bloomberg Economics expects higher tariffs to pose upside risks to inflation, although the overall impact on consumer prices will depend in part on whether workers can negotiate higher wages and amplify the inflationary effect. A weak labor market, on the other hand, would dampen demand and could offset the tariffs.
The Fed cut interest rates by a quarter point last week, and Powell said the election would have “no impact” on the central bank’s near-term decisions. He said it was too early to know the timing or content of possible fiscal policy changes.
That hasn’t entirely assuaged traders’ concerns, as companies like Stanley Black & Decker Inc. and Jacuzzi Corp. is already thinking about it Price increases in response to higher tariffs.