Traders, don't panic! The tariff issue will not actually impact the Federal Reserve?

Durham Abric, the U.S. inflation chief at Citadel Securities, stated that the Federal Reserve's path to interest rate cuts may not be disrupted by the upcoming protectionist stance of the Trump administration.

In an interview on Wednesday, Abric said, “The Federal Reserve may overlook the impact of tariffs, as monetary policy has little effect on temporary, tariff-driven inflation.”

Former President Trump imposed punitive tariffs on U.S. imports during his first term and has made it clear that he will do so again after taking office in January. While this could potentially drive up consumer prices, Abric noted that Fed Chairman Jerome Powell and his team would be eager to avoid overreacting to any potentially short-lived economic impacts.

He stated that, after all, the tariffs from the first term had a limited impact on overall prices. While new tariffs may temporarily pressure prices, Abric believes they will not have a significant impact on the Fed's policy.

Abric mentioned, “Given the Fed's inclination to cut rates, the recent rise in front-end real yields may be nearing its end; however, with expectations for stronger growth and persistent inflation, long-term yields may continue to rise.”

Since mid-September, expectations for the Fed's policy rate have risen significantly more than expectations for inflation, pushing terminal real rate expectations up to nearly 1.25%, the highest level since July.

Abric's comments came after key inflation data on Wednesday aligned with expectations and led to a decline in U.S. Treasury yields. Long-term rates have remained elevated since the November 5 election.

Economists expect that higher tariffs will pose upside risks to inflation, but the overall impact on consumer prices will depend in part on whether workers can negotiate higher wages and reinforce inflation effects. On the other hand, a weak labor market will suppress demand and may offset the impact of tariffs.

The Federal Reserve lowered rates by 25 basis points last week, and Powell stated that the election would have “no impact” on the Fed's short-term decisions. He said it is still too early to assess the timing and substance of any potential fiscal policy changes.

However, this has not completely alleviated traders' concerns, as companies like Stanley Black & Decker Inc. and Whirlpool Corp. are already considering raising prices in response to the tariff increases