Why Tariffs Could Derail the Fed’s Rate Cut Plans

Economists expect the Federal Reserve to cut interest rates at its September meeting, with another cut likely before the end of the year. On the surface, the reasoning is clear. The labor market is slowing, inflation has cooled somewhat, and the Fed has room to ease. But one factor threatens to complicate that story. Tariffs.

Tariffs do not always make headlines, but they have a powerful effect on prices. When the United States imposes tariffs on imports, it raises the cost of goods for domestic companies. Those companies then pass the higher costs to consumers. What begins as a trade measure quickly turns into price pressure. And it does not take long for that pressure to ripple across the economy.

What makes this situation particularly tricky is that the inflation coming from tariffs is not something the Fed can easily control. It is not caused by too much consumer demand. It is not a result of easy credit. It is policy-driven and largely external to monetary policy. Raising or lowering interest rates does not solve it. The Fed can only hope that these price increases are temporary.

Most economists believe they will be. They argue that tariff-related inflation will fade once markets adjust. But there is a real risk that those assumptions prove too optimistic. If businesses and consumers begin to expect prices to keep rising, temporary inflation can turn into something much more persistent. Expectations matter, especially when the Fed is trying to maintain its credibility.

There is also the added weight of services inflation, which tends to move slowly but stays elevated once it rises. The Fed is already watching this closely. If tariff-related goods inflation combines with sticky services inflation, the picture changes quickly. The path to further rate cuts would become much narrower.

This puts the Fed in a tough spot. It wants to respond to slowing growth and a weakening job market. But it cannot move too quickly if it sees signs that inflation might come back. A rate cut in September still looks likely. A second cut later this year remains possible. But both depend on inflation staying contained.

Tariffs could quietly undo that progress. That is why the Fed is proceeding carefully. It is trying to thread a needle. Loosen too early and it risks reigniting inflation. Wait too long and it risks slowing the economy even further.

So while the headlines may focus on interest rate cuts, the real story may be elsewhere. The effects of tariffs are building underneath the surface. And if they do not fade soon, the Fed’s flexibility could disappear just when it needs it most.