Tariffs may have ‘slammed shut’ the window for interest rate cuts in 2025, economist says

Tariffs set to take effect Tuesday may mean consumers won’t get a reprieve from high borrowing costs this year, according to economists.

President Donald Trump signed orders on Saturday to impose tariffs on the three largest trading partners with the U.S.: 25% tariffs on imports from Canada and Mexico, and a 10% tariff on China.

Economists expect such tariffs — if implemented and kept in place — to raise prices for U.S. consumers.

That upward pressure on inflation — at a time when it hasn’t yet fallen back to target — may push the Federal Reserve to pause its campaign to lower interest rates for the foreseeable future, economists said.

The Fed’s benchmark interest rate affects consumer borrowing costs on credit cards and other types of debt.

“Under those circumstances, the window for the Fed to resume cutting interest rates at any point over the next 12 to 18 months just slammed shut,” Paul Ashworth, chief North America economist at Capital Economics, wrote in a note Saturday after Trump signed the tariff orders.

‘A lot of uncertainty’ on Trump tariff policy

Of course, the situation is fluid, making a precise assessment a near impossibility, economists said.

For example, Trump said on Monday he’d pause a 25% tariff on Mexico from taking effect for a month after Mexican President Claudia Sheinbaum agreed to immediately send 10,000 soldiers to her country’s border to prevent drug trafficking.

It appears, for now, that tariffs on Canada and China will take effect Tuesday as planned.

“There’s a lot of uncertainty about how policies unfold,” Susan Collins, president the Federal Reserve Bank of Boston, told CNBC Monday.

How tariffs may impact inflation, interest rates

Tariffs on Canada, China and Mexico — if enacted on a long-term basis — are estimated to increase U.S. inflation by 0.5 to 1 percentage points through 2026, according to Joe Seydl, senior markets economist at J.P. Morgan Private Bank.

Those estimates are for “core” prices (which strip out energy and food costs) as measured by the Personal Consumption Expenditures Price Index, the Fed’s preferred inflation gauge.

That’s important because the Fed uses interest rate policy to keep inflation and the labor market in check. Elevated inflation would, all else equal, be expected to keep interest rates higher for longer.

Tariffs on Canada, China and Mexico “would push up” PCE inflation by roughly 0.7 percentage points, relative to a no-tariff baseline, to around 2.8% in the fourth quarter of 2025, according to a note published Tuesday by Evercore ISI.

“That would knock out at least one and plausibly both remaining Fed cuts this year,” the Evercore note said.

In December, Fed officials forecast they’d cut interest rates twice in 2025.

“Obviously there is some uncertainty about whether these tariffs will go ahead or not, given the one-month pause of the Mexico one announced today,” Stephen Brown, deputy chief North America economist at Capital Economics, wrote in an e-mail. “If the tariffs go ahead, it’s unlikely that the Fed will cut again.”

While some have suggested that tariffs may push the central bank to raise interest rates again, Brown thinks that’s unlikely. Tariffs would likely be a drag on the U.S. economy, he said.

Likewise, J.P. Morgan projects that proposed tariffs would reduce U.S. gross domestic product — a measure of economic output — by 0.5 to 1 percentage point through 2026, Seydl said.

That economic drag could outweigh the inflationary impact of tariffs and eventually lead the Fed to cut rates, he said.