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Fed Faces Tough Choices as Trump’s Tariffs Threaten Recession and Inflation

by Team Lumida
April 9, 2025
in News
Reading Time: 4 mins read
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Why Mortgage Servicers Are Thriving Amid High Rates

"Governor Jerome H. Powell testifies before the Senate Committee on Banking, Housing, and Urban Affairs: GP_Senate_062217-7420" by Federalreserve is licensed under CC PDM 1.0

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Key Takeaways:

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  • President Trump’s sweeping tariff hikes, set to take effect Wednesday, are creating a dual challenge for the Federal Reserve: rising inflation and slowing economic growth.
  • Economists warn that tariffs could push the U.S. closer to a recession by weakening hiring and spending, while also driving up prices for imported goods and materials.
  • Fed Chair Jerome Powell has indicated no immediate plans to cut rates, but investors are betting on rate cuts later this year to counteract the economic slowdown.
  • The Fed’s ability to respond is limited, as rate cuts may not effectively address the uncertainty and structural challenges caused by the trade war.

What Happened?

The Federal Reserve is grappling with a difficult policy dilemma as President Trump’s tariff hikes create conflicting pressures on the economy. The tariffs are expected to raise prices for imported goods, fueling inflation, while also dampening hiring and spending, which could push the economy closer to a recession.

Fed Chair Jerome Powell has signaled a cautious approach, stating that the central bank doesn’t “need to be in a hurry” to cut rates. However, investors are betting on rate cuts later this year, anticipating that the economic slowdown will outweigh inflation concerns.

Businesses are already bracing for the impact of tariffs, with some freezing hiring and cutting costs. Meanwhile, the Fed faces political pressure from Trump, who has called for rate cuts, complicating its decision-making process.


Why It Matters?

The Fed’s dual mandate—to maintain low inflation and a healthy labor market—is being tested as tariffs create opposing pressures. Cutting rates to cushion the economy risks prolonging inflation, while keeping rates steady could exacerbate the economic slowdown.

The uncertainty surrounding Trump’s trade policies adds another layer of complexity, as businesses and consumers struggle to predict the long-term impact of tariffs. The Fed’s ability to influence expectations and stabilize markets is limited in the face of such structural challenges.

The broader implications of the trade war, including potential capital flight and a loss of U.S. economic primacy, further complicate the Fed’s task.


What’s Next?

The Fed will closely monitor economic data, particularly inflation and labor market indicators, to determine its next steps. However, rate cuts may have limited effectiveness in addressing the structural issues caused by tariffs, such as disrupted supply chains and higher production costs.

The long-term resolution of the trade war will likely require policy changes beyond monetary measures, including trade negotiations and structural economic adjustments. In the meantime, businesses and investors will continue to navigate an uncertain economic landscape.

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© 2025 Lumida Wealth Management LLC is an SEC registered investment adviser. Privacy Policy. Cookies Policy.
Disclaimer Important Information This site is for informational purposes only. Information presented on this site does not constitute as investment advice.

Lumida Wealth Management LLC (‘Lumida”) is an SEC registered investment adviser. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability.

Lumida's website (referred to herein as the "Website") is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links. Accordingly, the publication of the Website on the Internet should not be construed by any client and/or prospective client Lumida’s solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the Internet.

Any subsequent, direct communication by Lumida with a prospective client will be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides.

‍Lead Capture Forms: By submitting your contact information in the forms on this site, you are not obligated to invest in Lumida's product or services.
‍Address: Lumida Wealth Management, 25 W 39th Street Suite 700, New York, NY 10018