Feds Inflation Dilemma Just Got More Challenging
The Federal Reserve’s preferred inflation gauge showed prices in February rose more than expected, re-intensifying the central bank’s inflation battle at a time when it expects new tariffs from the Trump administration to push prices higher. The new reading makes it more likely that officials hold rates at current levels for longer as policymakers look for signs of how President Trump's policies will affect the US economy in the months ahead. Fed Chair Jay Powell has said his "base case" is that any extra inflation from Trump's slate of tariffs will be "transitory." But some of his colleagues worry the effects could be more persistent, adding to the uncertainties ahead for the central bank. The Fed's goal is to get inflation down to its 2% target, but the key measure released Friday remains well above that marker. The "core" Personal Consumption Expenditures (PCE) Index, which excludes volatile food and energy prices, rose 2.8% year-over-year. That reading was higher than economists' estimate of 2.7%, jumping from 2.6% in January. The month-over-month reading was also hotter, clocking in at 0.4%. That was higher than the 0.3% expected and up from that same level in the previous month. Fed officials raised their 2025 inflation forecast at a meeting last week, to 2.8% from 2.5% previously, due in large part to uncertainty surrounding the new tariffs. They also lowered their economic growth forecasts for the year. But February’s inflation report now shows that even the Fed’s revised inflation forecast may prove to be too conservative. Traders are still pricing in an interest rate cut in June with the potential for another cut in the fall. And the two-cut prediction from Wall Street still matches what Fed officials estimated at their meeting last week where they held rates unchanged. While Powell has argued in favor of a potential "transitory" effect, some of his colleagues have offered more caution. Boston Fed president Susan Collins believes it’s “inevitable that tariffs are going to increase inflation in the near term” and she expects the uptick in inflation could be short-lived. But she added, “if there are additional rounds of tariffs, they are more broad-based, or if there are different levels of retaliation, then inflation could be more persistent than just a relatively fast adjustment to a higher level of prices.”
