Investing.com– The Federal Reserve is expected to largely disregard any inflationary effects stemming from tariffs under Donald Trump’s administration, as such impacts are viewed as one-time price level increases rather than persistent inflationary pressures, Goldman Sachs analysts said in a research note.
However, analysts acknowledged concerns that tariffs could lead to higher inflation expectations, a development that might constrain the Fed’s policy flexibility. These expectations could become more sensitive given the recent surge in inflation, they said.
Goldman Sachs cited economic studies showing that individuals’ lifetime inflation experiences significantly shape their inflation expectations. Using data from the University of Michigan’s consumer sentiment survey, the analysts noted that recent inflation experiences, particularly in highly visible areas like gasoline prices, have an outsized impact on public sentiment.
Based on these findings, the analysts projected that tariffs, under their baseline scenario, would have minimal effects on inflation expectations. Even in a scenario involving a 10% universal tariff, one-year inflation expectations might rise by 0.5 percentage points, and five-year expectations by just 0.1 percentage points.
However, Goldman Sachs warned that tariffs could have a larger psychological impact if price increases garner significant media attention, akin to gasoline price spikes. Recent jumps in Michigan inflation expectations and frequent mentions of tariffs in survey responses suggest that such effects are plausible, analysts stated.
This heightened public sensitivity to tariff-driven price changes might influence policymakers. The Federal Open Market Committee (FOMC) could refrain from cutting rates under such circumstances, while the White House might face pressure to limit further tariff increases, the analysts concluded.
