Looming tariffs threaten to interrupt Americans' economic gains
Add Axios as your preferred source to
see more of our stories on Google.
Illustration: Sarah Grillo/Axios
New data on Friday gives the best snapshot yet of where economic conditions stand before a potential continentwide trade war.
Why it matters: If tariffs prove disruptive to growth, the U.S. is starting from a position of strength — unlike other major economies — which might cushion the blow of tariffs better than otherwise would have been the case.
- The risk, however, is an interruption of Americans' economic gains in recent years, while making inflation a longer-term feature of the economy.
Driving the news: The latest economic data supports the narrative that the economy came into 2025 with momentum. But inflation still looked sticky, as previewed in Thursday's GDP report — a concern for the many economists who believe tariffs will make above-normal price pressures harder to beat.
- For the third month, the core Personal Consumption Expenditures Price Index — which strips out food and energy prices and is closely monitored by the Federal Reserve — didn't budge.
- It rose 2.8% in the 12 months through December, above the Fed's 2% target.
- By a different measure, however, inflation looks more benign: Core PCE rose 2.2% on an annualized basis in the previous three months, down from 2.6% in November.
Between the lines: Consumer spending was solid, rising 0.7% in December, or 0.4% in real terms.
- Still, that jump outpaced the rise in incomes: The personal saving rate was 3.8%, down 0.3 percentage point from November and the lowest level in two years.
Flashback: Fed officials were focused on preserving economic growth during the Trump 1.0 trade wars. This time, the economy is holding up, even under the weight of higher interest rates. There is also a new variable: too-high inflation.
- Fed chair Jerome Powell said at a news conference earlier this week that might play a role in how tariffs land on the economy and whether they result in price hikes.
What they're saying: "We've just come through a high inflation period, and you can argue that both ways: you can say that companies have figured out that they do like to raise prices — but we also hear a lot from companies these days that consumers have really had it with price increases," Powell said.
- "There are lots of places where that price increase from the tariff can show up between the manufacturer and the consumer," he added. "Just so many variables."
The intrigue: In a speech Friday morning, Fed governor Michelle Bowman did not mention Trump's trade threat. But she did warn about upside risks to inflation, noting that global supply chains remain "susceptible to disruption."
- Bowman raised the possibility that interest rates might not be high enough to restrict the economy and cool inflation.
- "In light of the ongoing strength in the economy and with equity prices substantially higher than a year ago, it seems unlikely that the overall level of interest rates and borrowing costs are exerting meaningful restraint," Bowman said.
What to watch: Trump is threatening to impose tariffs on a wide scale Saturday, another key difference between his first White House stint.
- Trump told reporters in the Oval Office on Thursday that he plans to move forward with 25% tariffs on Mexico and Canada. It's unclear whether they will go into effect right away or exclude any imports.
- Canadian Prime Minister Justin Trudeau says the nation will hit back.
The bottom line: Trump is at the helm of a different economy now. If his trade threats do materialize, the effects are unpredictable.
