Trump tariffs expected to increase inflation, interest rates

• President-elect Donald Trump said he would impose tariffs on imported goods.
• Economists said the proposals could increase inflation and raise prices for consumers.
• The Federal Reserve is likely to respond to inflation by raising interest rates to curb demand.

One of the first policies President-elect Donald Trump is expected to enact after being sworn into office is to impose tariffs on imported goods.

Many economists say these tariffs, as well as some of his other proposals, could spark another bout of inflation and interest rate hikes.

Trump has said his proposal would not affect U.S. prices. “I’m going to put tariffs on other countries coming into our country, and it has nothing to do with taxes for us. It’s a tax on another country,” he said in a speech in August.

Some experts have argued otherwise. Economists and investors expect that taxes on imports will be passed on to American consumers in the form of higher prices. In an economic ripple effect, households would then pay higher interest rates on loans of all kinds as the Fed moves to tame recently resurgent inflation.

Raising tariffs from Trump’s first term is expected to eat into Americans’ wallets

On the campaign trail, one of Trump’s cornerstone proposals was a 60% tariff on goods imported from China and a rate of 10% to 20%. on imports from other countries.

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The US Census Bureau reported that broad tariffs would likely affect the prices of automobiles, human and veterinary medicine, food and beverages, furniture and household appliances.

Trump could announce these changes as soon as he takes office because they would not require congressional approval, but because implementation could take time, consumers would not see higher prices immediately.

An analysis of the nonpartisan Peterson Institute examined Trump’s proposed 60% tariff on goods imported from China and estimated that it would increase inflation by 0.4 percentage points in 2025. The estimate does not include Trump’s proposal for a 10% to 20% tariff on other imports .

Markets are too expect higher inflation under Trump; bond yields rose after Trump’s victory. That led to the 30-year fixed mortgage rate rising, meaning home buyers are on track to see higher interest rates on loans.

An analysis by the nonpartisan Tax Policy Center found that Trump’s policies would reduce after-tax income by an average of $1,800 in 2025. A separate analysis of the left-leaning Center for American Progress said his tariff plans could cost the typical American household an extra $1,500 a year.

Tariffs are typically used to raise government revenue and boost domestic production. Trump adopted them in his first term as part of his “America First” policies, including a 25% tariff on Chinese goods that ultimately led to a trade war between the two economies. Although they did not significantly affect inflation, they raised taxes for consumers. The Tax Foundation estimated that Trump’s first-term tariffs amounted to a nearly $80 billion tax hike on Americans who buy Chinese imports.

Trump’s victory is also expected to influence the Federal Reserve’s upcoming decisions on interest rates. While it’s too early for the Fed to make any adjustments since Trump has yet to implement any tariffs, members of the Federal Open Market Committee are likely to begin discussing how Trump’s future economic policies could affect consumers — including whether the central bank will need to increase interest rates in the future in response to inflationary pressures.

The Fed is expected to cut interest rates by 25 basis points on Thursday, and Fed Chairman Jerome Powell is likely to provide some insight into the Fed’s direction following Trump’s victory.

However, the future of the Federal Reserve is uncertain under Trump. The president-elect has previously suggested that he would like to have a say in interest rate decisions, something presidents do not currently have. This raises the question of whether the central bank will continue to remain politically independent.

Americans will likely learn more about what to expect from Trump as the year winds down. While Trump has maintained that his policies will help the economy and leave Americans better off, Nobel Prize-winning economist Joseph Stiglitz previously told Business Insider that the “general consensus” among experts is that “the Trump administration would be more inflationary.”

“The broad assessment of the consequences of that is that the Fed would be forced to raise interest rates, and all of that combined would still serve to increase inflation even as unemployment rose and GDP slowed,” he said.