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How Inflation, Tariffs, and More Could Affect Your Finances in 2025



The Federal Reserve has decided to hold interest rates steady following their first meeting of 2025. The central bank cited a strong labor market, a growing economy, and "somewhat elevated" inflation as reasons to maintain a wait-and-see approach. However, this stance contrasts with President Trump’s calls for immediate rate cuts. Meanwhile, other policies, such as tariffs, could also impact the economy. Joining me to discuss the Fed’s decision, the new administration’s direction, and the economic outlook is Preston Caldwell, senior U.S. economist at Morningstar Investment Management.


Thank you for being here, Preston.


**Fed Meeting January 2025: Was Pausing Rate Cuts the Right Move?**  

**Preston Caldwell:** Thanks for having me, Ivanna.


**Hampton:** The Fed cut rates three times in a row to close out 2024 but paused at their January meeting. Was this the right decision, and why?


**Caldwell:** To provide some context, the Fed kept its federal funds rate unchanged at a target range of 4.25% to 4.50%, as widely expected. Last year, the Fed cut rates by a cumulative 1 percentage point between September and December. Before that, rates had been at a high plateau of 5.25% to 5.50% since July 2023.


Even though rates are still high compared to the pre-pandemic average of 1.6% from 2017 to 2019, I believe the Fed made the right call by not rushing to cut further. Inflation is nearing normal levels but hasn’t quite reached the Fed’s 2% target. While lower rates will eventually be needed to sustain healthy economic growth, there’s no urgent need for cuts right now, as the economy and labor market remain strong.


**Hampton:** President Trump recently demanded that interest rates drop immediately. As an independent agency, how did Fed Chair Jerome Powell respond to this pressure?


**Caldwell:** Powell handled it appropriately by avoiding the topic during his press conference. The Fed has fiercely guarded its independence for decades, a tradition solidified under Paul Volcker in the 1980s. This independence isn’t going to disappear overnight. The Fed’s mandate is to control inflation, and cutting rates too soon could undermine that goal. Powell’s reluctance to engage in political debates reflects the Fed’s commitment to its mission.


**Outlook for Inflation in 2025**  

**Hampton:** The Fed described inflation as "somewhat elevated," hovering above its 2% target. Why does this target seem so elusive?


**Caldwell:** We’re almost there. Core PCE inflation stood at 2.8% year-over-year as of November 2024. However, if the first quarter of 2025 avoids a repeat of last year’s price increases, the year-over-year rate could drop to 2.4% or lower by March. Housing inflation, a major driver of high inflation in 2024, is finally starting to decline, which is encouraging. If inflation continues to normalize, the Fed could soon declare victory in its fight to bring inflation back to target.


**How a Strong Labor Market Fits Into the Fed’s Outlook**  

**Hampton:** The labor market has been strong. How does this factor into the Fed’s outlook?


**Caldwell:** The labor market’s resilience has reduced expectations for rate cuts in 2025. Last fall, unemployment rose by 60 basis points, triggering the Sahm Rule, a traditional recession indicator. However, unemployment has since stabilized at around 4.15%, easing concerns about a deteriorating labor market. This stability has removed much of the urgency for rapid rate cuts.


**Why Mortgage Rates Rose While Interest Rates Fell**  

**Hampton:** Mortgage rates increased even as the Fed cut rates late last year. Why did this happen, and what would it take to bring relief to homebuyers?


**Caldwell:** Mortgage rates are tied to the longer end of the yield curve, particularly the 10-year Treasury yield. While the Fed’s rate cuts affect short-term rates, the 10-year Treasury yield has risen by about 100 basis points since September 2024, pushing mortgage rates higher. This increase reflects reduced market expectations for future Fed rate cuts. For mortgage rates to fall, longer-term yields would need to decline, which could happen if the market anticipates more aggressive Fed easing.


**When Is the Next Fed Meeting in 2025?**  

**Hampton:** The Fed’s next meeting is in March, but some economists predict the first rate cut of 2025 won’t happen until June. What’s your forecast?


**Caldwell:** I expect four rate cuts this year, with the first likely in March. However, the Fed might wait longer to assess incoming data. Markets currently anticipate only two cuts in 2025, but I believe inflation will continue to normalize, potentially falling below the Fed’s target by year-end. Slower economic growth and a softening labor market could prompt the Fed to cut more aggressively than expected.


**Are Interest Rates Going Down in 2025?**  

**Caldwell:** Yes, I expect rates to decline. By early 2027, I forecast the federal funds rate will fall to 2.25% to 2.50%, closer to the pre-pandemic average of 1.6%.


**How Mass Deportations Could Affect Businesses and Consumers**  

**Hampton:** The Trump administration has begun implementing mass deportations. Could this policy heat up inflation?


**Caldwell:** I’m skeptical. The current deportation rate isn’t significantly higher than historical norms, and without new legislation, the government lacks the resources to deport large numbers of people. While deportations could theoretically tighten the labor market, I don’t expect them to have a major macroeconomic impact.


**How U.S. Tariffs Could Affect Consumer Goods Prices**  

**Hampton:** Could potential tariffs push up prices for consumers?


**Caldwell:** Tariffs are a wildcard. While they could temporarily increase prices, I doubt they’ll be maintained long enough to cause sustained inflation. During the first Trump administration, tariffs on China were partially offset by rerouting trade through third countries and exempting many consumer goods. A similar outcome is likely this time.


**Tracking Inflation, Financial Conditions, and the Housing Market**  

**Hampton:** What economic data or policy decisions are you watching closely?


**Caldwell:** I’m monitoring inflation data, particularly whether core PCE inflation continues to decline. I’m also watching financial conditions, as rising asset prices have bolstered consumer confidence. A reversal could prompt faster rate cuts. Finally, the housing market is critical. If mortgage rates remain high, housing demand could weaken further, impacting the broader economy.


**Hampton:** You’ve got a lot to keep an eye on, Preston. Thanks for sharing your insights on the Fed’s decision and the economic outlook. I look forward to checking in with you again soon.


**Caldwell:** Thanks, Ivanna. It’s been a great conversation.


**Hampton:** That’s it for this week’s episode. Thanks for tuning in and making *Investing Insights* part of your day. Subscribe to Morningstar’s YouTube channel for more on investment ideas, market trends, and analyst insights. Thanks to senior video producer Jake VanKersen and associate multimedia editor Jessica Bebel. 

  President Donald Trump wasted little time this week trying to assign blame for the nation’s deadliest air disaster in more than two decades. Among his chief targets: An FAA diversity hiring initiative he suggested had undermined the agency’s effectiveness.

“But certainly for an air traffic controller, we want the brightest, the smartest, the sharpest. We want somebody that’s psychologically superior,” Trump said at a news conference Thursday.

No evidence has emerged that rules seeking to diversify the FAA played any role in the collision Wednesday between an American Airlines regional jet and an Army Black Hawk helicopter that killed 67 people.

Nevertheless, Trump’s comments drew attention to the agency’s attempts to address its most pressing and long-standing problem — a persistent shortage of air traffic controllers who are critical to keeping the nation’s skies safe.

How has Trump tied diversity hiring to the collision?

Trump is using this week’s disaster as another opportunity to push back against diversity programs, after signing executive orders that banned such initiatives across the federal government. That included one specifically for the secretary of transportation and the federal aviation administrator.

During the White House press briefing, Trump said the FAA diversity program allowed for hiring people with hearing and vision issues, as well as paralysis, epilepsy, and “dwarfism.”

“The FAA is actively recruiting workers who suffer severe intellectual disabilities, psychiatric problems and other mental and physical conditions under a diversity and inclusion hiring initiative spelled out on the agency’s website,” he said.

The FAA’s own data shows people with such disabilities make up only a tiny fraction of air traffic controllers. And there is no indication that investigators into the crash are focused on diversity hiring or staffers with disabilities.

Later Thursday, Trump doubled down on his criticism by signing a presidential memorandum on aviation safety he said would undo “damage” done to federal agencies by the Biden administration’s diversity and inclusion initiatives.

Are FAA diversity initiatives part of the investigation?

Asked Thursday about Trump’s comments, National Transportation Safety Board Chair Jennifer Homendy said her team examines all factors in any investigation, “the human, the machine and the environment.” She said that means looking at the people involved, the aircraft, and the environment in which they were operating.

“That is standard,” she said.

Trump’s remarks drew strong rebukes from Democrats and civil rights leaders.

“There are still bodies being pulled from the Potomac River. Families are grieving the loss of loved ones. Yet Donald Trump is baselessly blaming DEI for last night’s tragic collision,” said Sen. Tammy Duckworth, a Democrat who lost both legs while flying Black Hawk helicopters in the Iraq War, referring to diversity, equity, and inclusion policies.

“Absolutely shameful,” Duckworth said on the X social media platform.

Democratic Sen. Ruben Gallego, a Marine veteran, was blunt in his response to Trump’s remarks. “DEI did not cause this tragedy,” he said on X.

Groups representing disabled workers issued a joint statement saying they were dismayed by the scapegoating, noting that anyone hired under the FAA’s diversity initiative had to meet its stringent qualifications.

“The implication that people are being hired to do a job for which they are unqualified is an unfounded lie that further reinforces harmful stereotypes against disabled people,” it said.

What’s behind the FAA’s recruitment strategy?

The FAA has long faced a shortage of air traffic controllers, which was compounded by the COVID-19 pandemic. Homendy told a Senate panel in 2023 that a surge in close calls between planes at U.S. airports that year was a “clear warning sign” that the aviation system was stressed.

The FAA’s diversity efforts aren’t new and were not started under the Biden administration.

Before Trump removed them from the agency’s website after taking office this month, they had been promoted since at least 2013, including during Trump’s first term. Similar language-seeking candidates with disabilities were on the site during both Biden’s term and Trump’s first term. Disabilities identified for special emphasis in hiring included conditions such as paralysis, epilepsy, or missing extremities.

The FAA during Trump’s first term launched a pilot program to prepare people with disabilities for jobs in air traffic operations.

2019 announcement detailed a program to enroll up to 20 people with targeted disabilities in up to a year of training at air traffic control centers, with the potential to be appointed to a temporary position at the FAA’s academy. It noted candidates were subject to the same rigorous standards for aptitude, medical and security qualifications as any other candidates. A federal report from 2023 describes the qualifications.

What do aviation experts say about the FAA’s recruitment program?

The FAA says its Aviation Development Program for hiring diverse candidates into “mission critical occupations” required them to meet the same qualifications as any other applicant.

Former FAA administrator Michael Whitaker said last year that the FAA seeks qualified candidates from a range of sources who must “meet rigorous qualifications” that vary by position.

Paul Hanges, a professor of industrial and organizational psychology at the University of Maryland, helped compile a report for the FAA in 2013 documenting barriers for women and minorities. The agency followed up by hiring a consulting firm to find the root causes, which led to changes in the testing and hiring process — but Hanges said that did not lower hiring standards.

“It was the same kind of protocol, the same cognitive test, but a different version of it,” he said. “One thing I know about the FAA is they take public safety very seriously. So I’d be surprised that they systematically did stuff that would have put the flying public in danger. I always got the impression that was job one.”

He called Trump’s assertion that this week’s crash is related to diversity efforts “an illogical leap.”

“It is something that is consistent with his message, but we don’t have the data,” he said.

How have the FAA’s recruitment efforts worked?

The agency’s recruitment programs have resulted in a modest deepening of its workforce diversity over the years. Progress has been especially slow in roles it considers “mission critical,” including air traffic controllers.

The FAA’s overall workforce of more than 44,000 employees remains predominately male, according to a 2023 FAA report on the status of its Equal Employment Opportunity program.

Among its nearly 18,000 air traffic controllers, more than 80% were men. White men constituted the biggest percentage of air traffic controllers at 64%, the report said.

The FAA’s overall workforce also remained predominately white, with racial minorities making up 30% of its employees.

About 2% of the FAA’s overall workforce are people with more severe disabilities. Among air traffic controllers, less than 1% are people with such disabilities.

The claims that diversity efforts factored into this week’s crash come after Trump surrogates blamed other recent crises, including the wildfires that devastated Los Angeles, on diversity, equity, and inclusion policies, although there has been no evidence to support that.

It’s a focus that has generated anger among those who feel Trump and his allies are quick to use horrific disasters to further their political agenda.

Democratic Sen. Dick Durbin specifically called out Trump for quickly pointing the finger this week at the FAA’s diversity programs: “The American people deserve real answers, not narcissistic speculations.”

President Donald Trump said this week that tariffs on U.S. neighbors Canada and Mexico will arrive Saturday. The two nations are not only close geographically but economically as well.

The business between the North American nations now exceeds China, totaling $1.8 trillion in 2023. That is far greater than the $643 billion in commerce that the U.S. did with China in that same year.

Following are just a few imported goods that could be hit first.

A ‘grenade’ lobbed into auto production

For decades, auto companies have built supply chains that cross the borders of the United States, Mexico, and Canada. More than one in five of the cars and light trucks sold in the United States were built in Canada or Mexico, according to S&P Global Mobility. In 2023, the United States imported $69 billion worth of cars and light trucks from Mexico – more than any other country -- and $37 billion from Canada. Another $78 billion in auto parts came from Mexico and $20 billion from Canada. The engines in Ford F-series pickups and the iconic Mustang sports coupe, for instance, come from Canada.

“You have engines and car seats and other things that cross the border multiple times before going into a finished vehicle,’’ said Cato’s Lincicome. “You have American parts going to Mexico to be put into vehicles that are then shipped back to the United States.

“You throw 25% tariffs into all that, and it’s just a grenade.’’

In a report Tuesday, S&P Global Mobility reckoned that “importers are likely to pass most if not all, of this (cost) increase to consumers.’’ TD Economics notes that average U.S. car prices could rise by around $3,000 – this at a time when the average new car already goes for $50,000 and the average used car for $26,000, according to Kelley Blue Book.

Higher prices at the pump

Canada is by far America’s biggest foreign supplier of crude oil. From January through November last year, Canada shipped the U.S. $90 billion worth of crude, well ahead of No. 2 Mexico at $11 billion.

For many U.S. refineries, there’s not much choice. Canada produces the “type of crude oil that American refineries are geared to process,’’ Lincicome said. “It’s a heavier crude. All the fracking and all the oil and gas we make here in the United States – or most of it – is a lighter crude that a lot of American refineries don’t process, particularly in the Midwest.’’

Trump said Thursday that he hasn’t yet decided whether to include Canadian and Mexico oil in the tariffs he still plans to impose Saturday.

If he did tax Canadian oil imports, Lincicome said, “How the heck does that shake out? My guess is that it shakes out just through higher gas prices, particularly in the Midwest.’’ TD Economics figures that Trump’s tariffs could push up U.S. gasoline prices by 30 cents to 70 cents a gallon.

Trouble in Margaritaville

Tariffs would raise the price for those raising a glass of tequila or Canadian whisky.

In 2023, the U.S. imported $4.6 billion worth of tequila and $108 million worth of mezcal from Mexico, according to the Distilled Spirits Council of the United States, a trade group. The U.S. imported $537 million worth of Canadian spirits, including $202.5 million worth of whisky.

Canada and Mexico were also the second-and third-largest importers of U.S. spirits in 2023, behind the European Union, the council said.

The council said the U.S. is already facing a potentially devastating 50% tariff on American whiskey by the European Union, which is set to begin in March. Imposing tariffs on Mexico and Canada could pile even more retaliatory action on the industry.

Chris Swonger, the council’s president and CEO, said he appreciates the goal of protecting U.S. jobs. But tequila and Canadian whisky – like Kentucky bourbon -- are designated as distinctive products that can only be made in their country of origin.

“At the end of the day, tariffs on spirits products from our neighbors to the north and south are going to hurt U.S. consumers and lead to job losses across the U.S. hospitality industry, just as these businesses continue their long recovery from the pandemic,” Swonger said.

Expensive avocados, just in time for the Super Bowl

For American consumers still exasperated by high grocery prices, a trade war with Canada and Mexico could be painful. In 2023, the U.S. bought more than $45 billion in agricultural products from Mexico –including 63% of imported vegetables and 47% of fruits and nuts. Farm imports from Canada came to $40 billion. A 25% tariff could push prices up.

“Grocery stores operate on really tiny margins,’’ Lincicome said. “They can’t eat the tariffs ... especially when you talk about things like avocados that basically all of them – 90% -- come from Mexico. You’re talking about guacamole tariffs right before the Super Bowl.’’

U.S. farmers are nervous, too, that Canada and Mexico will retaliate by slapping tariffs on American products such as soybeans and corn. That’s what happened in the first Trump administration. China and other targets of Trump tariffs hit back by targeting the president’s supporters in rural America. Exports of soybeans and other farm products dropped, so Trump spent billions of U.S. taxpayer money to reimburse farmers for lost sales.

“President Trump was as good as his word,’’ said Mark McHargue, a Central City, Nebraska, farmer who grows corn, soybeans, popcorn and raises hogs. “It did take the sting out of it. That’s for sure.’’ But he would prefer to see the government push to open foreign markets to American farm exports. “We would rather get our money from the market,’’ said McHargue, president of the Nebraska Farm Bureau. “It doesn’t feel great to get a government check.’

The 25% tax that President Donald Trump plans to slap on imports from Canada and Mexico as soon as Saturday could drive up the price of everything from gasoline and pickup trucks, to Super Bowl party guacamole dip.

The tariffs would also invite retaliation. Doug Ford, the premier of Ontario, has already vowed to counterpunch by pulling American alcohol off store shelves in the Canadian province – no idle threat; Canada is the world’s No. 2 market for America’s distilled spirits (behind the 27-nation European Union).

Trump’s tariffs threaten to blow up the trade agreement he negotiated with America’s neighbors in his first term. His U.S.-Mexico-Canada Agreement – “the fairest, most balanced, and beneficial trade agreement we have ever signed into law,’’ Trump once declared -- was supposed to bring predictability to North American trade, giving businesses the confidence to make investments.

But when it comes to the self-proclaimed “Tariff Man,’’ Trump and his passion for plastering taxes on foreign goods, nothing is predictable, and nothing is ever really settled.

“Tariffs at those levels and at that scope would effectively destroy the agreement that Trump himself negotiated and always brags about,’’ said Scott Lincicome, a trade analyst at the libertarian Cato Institute.

The president says the 25% levies are designed to pressure America’s two neighbors to do more to stop the flow of undocumented immigrants and fentanyl into the United States.

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The White House says President Donald Trump will put in place 25% tariffs on imports from Canada and Mexico and 10% tariffs on goods from China effective on Saturday. There was no word on whether there would be any exemptions.

Michael Robinet of S&P Global Mobility and many other analysts suspect the tariff threat is also designed to get Canada and Mexico to go along with America’s demands for changes to the USMCA when it comes up for renewal next year.

Robinet, executive director of automotive consulting at S&P Global, said he doubts that Trump will go ahead with 25% across-the-board tariffs on Canadian and Mexican imports – what he calls a “shock-to-the-system’’ approach that would freeze the North American economy in a “Tariff Winter.’’ Instead, Robinet said, Trump might postpone or phase in the tariffs or initially exempt some industries to show Canada and Mexico how much worse things could get if he doesn’t get his way.

Trump pressured Mexico and Canada into agreeing to the USMCA five years ago, partly to narrow the United States’ big trade deficit – the gap between what the U.S. sells and what it buys.

It hasn’t worked out that way.

The U.S. deficit in the trade of goods with Mexico has widened from $106 billion in 2019 to $161 billion in 2023 (the last full year for which numbers are available). That is partly because Mexico has replaced China, locked in an ongoing trade war with the United States, as the source of many U.S. imports – furniture, textiles, shoes, laptops, and computer servers.

The trade gap in goods with Canada has ballooned, too: From $31 billion in 2019 to $72 billion in 2023. The deficit largely reflects America’s imports of Canadian energy.

“The USMCA has not met the goals that Trump set forth for it. Our trade deficit with Canada and Mexico is bigger than it was, considerably,’’ said Lori Wallach, director of the Rethink Trade program at the American Economic Liberties Project and a longtime critic of America’s free trade pacts. “A lot of jobs have been offshored to Mexico since USMCA.’’

When the USMCA comes up for renewal next year, the U.S. is expected to press for rules that would do more to encourage factories to produce in the United States. And it could seek a crackdown on Chinese goods being sent through Mexico to the United States to evade tariffs that Trump and President Joe Biden imposed on Beijing.

The United States now does far more business – exports and imports alike – with both Canada and Mexico than it does with China. In 2023, U.S. trade of both goods and services with Canada and Mexico came to more than $1.8 trillion, compared with $643 billion with China. Because of USMCA – and the regional trade deal it replaced in 2020 – most products across the region’s borders tariff-free.

The threatened 25% tariffs are causing heartburn in corporate boardrooms. If Trump goes ahead with his threat, tariffs would surge from $1.3 billion to $132 billion a year on Mexico’s imports to the United States and from $440 million to $107 billion on Canada’s, according to the tax and consulting firm PwC.

And no one knows if Trump will really pull the trigger or how long the tariffs will stay in place if he does. “It’s really thrown the industry into this turmoil of anxiety,” said trade lawyer Chandri Navarro, senior counsel at Baker & McKenzie. “What industry likes is certainty. You’re making production decisions, supply chain decisions, purchasing decisions five years out.’’

Trump views tariffs as a fix-it for most of what ails the economy. He says they raise money for cuts in income and corporate taxes, encourage companies to move production to the United States, and offer useful leverage in pressuring other countries to make concessions on trade and other issues.

Trump administration officials also say critics of potential tariffs shouldn’t view them in isolation, arguing that their other policies, including lowering taxes and easing regulations, will strengthen the economy.

Companies are scrambling to prepare. Some bought goods and shipped them to the United States ahead of time to beat the tariffs. Others are calculating how much of the cost they can pass along to their customers. “Unfortunately, it’s going to impact a lot of consumers,’’ said Dave Evans, co-founder and CEO of Fictiv, a San Francisco company that helps clients manage their supply chains in plastics and metals. “We saw this in his first term. A tariff isn’t fully absorbed by the companies.’’

Canada and Mexico are bracing, too. Chrystia Freeland, the former finance minister who represented Canada in USMCA negotiations, has called for retaliation if Trump moves ahead with tariffs. “Being smart means retaliating where it hurts,” said Freeland, who is running to replace prime minister Justin Trudeau. “Our counterpunch must be dollar-for-dollar — and it must be precisely and painfully targeted: Florida orange growers, Wisconsin dairy farmers, Michigan dishwasher manufacturers, and much more.”

Mexico President Claudia Sheinbaum said Friday that Mexico has maintained a dialogue with Trump’s team since before he returned to the White House. She emphasized that the communication has been constant and continuing.

Trump has made clear that he has two main interests: immigration and fentanyl, Sheinbaum said. Her team is coordinating with the U.S. government on both of those issues, she said.

On trade, “We shouldn’t see ourselves as competitors,” she said, but rather as partners. But if the U.S. imposes tariffs, Mexico is prepared and has been for months, Sheinbaum said.

“Now the Mexican people must know that we are always going to defend the dignity of our people, we are always going to defend the respect of our sovereignty and a dialogue between equals, as we have always said, without subordination,” Sheinbaum said.

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