A cooler inflation reading from the month when President Trump’s tariffs went full blast likely won’t shake the Federal Reserve’s stance of holding interest rates steady, with policymakers still seeing a risk that duties push prices higher as the year progresses.
“We’ll have to wait until next month to get a real sense of how tariffs are affecting the economy,” Morgan Stanley Wealth Management chief economic strategist Ellen Zentner said. “The question isn’t whether tariffs will have an impact, it’s a question of how big that impact will be.”
The “core” Personal Consumption Expenditures (PCE) index — which strips out food and energy costs and is closely watched by the central bank — rose 2.5% on an annual basis in April. The Fed’s goal is to get this number down to 2%.
The new reading was in line with expectations and cooler than the 2.7% annualized change recorded in March. Core prices also rose 0.1% in April from the prior month, in line with expectations for a 0.1% increase and the monthly increase seen in March.
Jeffrey Roach, chief economist for LPL Financial, said Friday’s inflation print is “as good as it gets,” as he expects prices to reaccelerate in the coming months.
“Headline inflation decelerated in April to the lowest inflation print we will likely see for the rest of the year,” Roach added.
The central bank is debating internally about whether any inflation from tariffs will prove to be a one-time increase or longer-lasting.
The White House has argued that the Fed should view any price increases as a one-time event, with Trump himself repeatedly calling for the Fed to lower rates, but many Fed officials have made it clear they are not sure which way things will go.
President Trump told Fed Chair Jerome Powell Thursday during a meeting at the president’s invitation that he is making a mistake by not lowering rates, echoing his calls all year for the Fed to cut rates.
The Fed said in a statement that Powell “did not discuss his expectations for monetary policy, except to stress that the path of policy will depend entirely on incoming economic information and what that means for the outlook.”
Read more: How much control does the president have over the Fed and interest rates?
Dallas Fed president Lorie Logan sent a strong veiled message Thursday night about holding rates steady in the face of President Trump’s calls to lower rates.
Logan said rates are in a “good place” now and that it could take “quite some time to know whether the balance of risks is shifting in one direction or another.”
She said the effects of rate changes take time to play out, and to get the balance right, the Fed needs to think about where the economy is headed, not just where it is now.
“In the short run, a central bank could always juice employment by cutting interest rates,” Logan said. “People might enjoy that for a little while. But over time, excessive rate cuts would trigger a spiral of inflation.”
Read more: How jobs, inflation, and the Fed are all related
Some Fed policymakers are arguing for “looking through” the impact of the duties as temporary, but Minneapolis Fed president Neel Kashkari said this week he believes trade talks could take “months or years” to resolve and that “there could be tit-for-tat tariff increases as trading partners respond to one another.”
According to minutes released from the Fed’s last policy meeting on May 6-7, almost all Fed members see the risk that inflation from tariffs could prove to be longer-lasting than expected.
Some thought tariffs on intermediate goods — parts used to make products such as steel or aluminum — could contribute to a more persistent increase in inflation. A few thought supply chain disruptions caused by tariffs also could have longer-lasting effects on inflation, reminiscent of such effects during the pandemic.
At the same time, several said a number of factors could offset the uptick and persistence in inflation, including reductions in tariff increases through trade negotiations, consumers’ low appetite for price increases, the potential for a weakening economy, or if firms move to increase market share rather than raise prices.
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