The Federal Reserve raised interest rates for the first time in three years Wednesday, a move intended to reduce inflation – but whether the central bank raises them again could hinge largely on President Donald Trump’s policies, according to economists.
The president decried the quarter-percentage-point increase, again calling for the central bank to lower interest rates at their next meeting. The increase brought the central bank’s benchmark interest-rate range from 3.5%-3.75% to 3.75%-4% and has left many wondering whether it is the first in a series of rate hikes, as Federal Reserve Chair Kevin Warsh has emphasized that reducing inflation is a top priority.
Ryan Young, senior economist at the Competitive Enterprise Institute, suggested the Fed’s path forward could largely depend on the Trump administration’s next steps on several key issues.
“The answer is not necessarily in the Fed’s hands. Upcoming policy choices on Iran, Canada, and tariffs will play a large role,” he said in a statement shared with The Center Square.
Young said that ending the conflict in Iran, ending the trade war with Canada, and either ending or reducing other existing tariffs according to a predictable schedule would all ultimately lower prices for Americans.
“Credibly ending the Iran war,” according to Young, would lower energy prices, though the come-down would be gradual. The car and construction industries would benefit from cheaper Canadian steel and lumber, while reducing or eliminating tariffs would relieve another source of upward pressure on prices.
Congress passed a Russia sanctions bill Wednesday that gives the president more authority over tariffs.
Jason Sorens, senior economist at the American Institute for Economic Research, said that while the Fed’s rate increase could slow economic activity in the short term, economic output should recover. The rate increase should also bring lower longer-term interest rates, including 10- and 30-year bond yields and mortgage rates.
Sorens argued, however, that the greater focus should be on the supply side of the economy when it comes to inflation, rather than the demand side, where Fed rate decisions have their effect.
“The Fed rate hike works on the demand side of the economy, not productivity,” Sorens told The Center Square. “Focusing on the Fed can be a distraction. The more important parts of the economy to focus on are supporting the cap-ex boom being driven by AI growth, reducing the energy shock caused by Middle East conflict, and reducing the trade shock caused by tariffs. All of these factors affect productivity.”
The Federal Reserve Bank of St. Louis calculated that tariffs have contributed between 0.26% and 0.56% to excess core inflation beyond the Federal Reserve’s 2% target from June 2025 and June 2026.
While he noted that tariffs put upward pressure on prices, Alfredo Carrillo Obregon, a policy analyst at the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies, cautioned against overstating their reach across the broader economy.
“Trade accounts for ‘only’ 25% of the total size of the U.S. economy. I think this statistic can be a bit misleading when evaluating the impact of across-the-board tariffs, as more than half of what we import is intermediate inputs or capital equipment,” Obregon said. “But on the flip side, it implies that 75% of the U.S. economy is driven by activity other than trade.”