Rising Tariff Costs Squeeze Consumers, as Federal Reserve Report Highlights Economic Strain

Economy’s main pillars—employment and consumer spending—are both straining under the weight of tariffs, according to a report from the Federal Reserve.

Tariffs are pushing up prices across the country. In response, companies are freezing hiring, and consumers are tightening their belts in many places. According to the “Beige Book” released by the Federal Reserve on Wednesday, a compilation of anecdotal reports from business leaders gathered nationwide between July and late August.

The report adds color to the picture painted by hard data on inflation and hiring. It also details the growing impact of tariffs that President Donald Trump ratcheted up this year.

The Fed found that economic growth stagnated in most of the country while slight growth occurred in four of its twelve districts.

Much of the 55-page report was devoted to the impact of tariffs. Some companies are passing the cost of the new import taxes on to consumers, while others are reluctant or unable to do so. Some expect to raise costs in the future.

Families in the Kansas City district were getting more frugal as tariff-related price hikes squeezed their budgets.

“Anecdotal reports include families opting for staycations in place of extended travel and some households returning vehicles within a year to avoid the burden of loan payments,” the report said. “As one pharmacy shared, shoppers are buying less retail merchandise but maintaining consumption for the more essential items. Firms anticipate this pattern to persist, with consumers prioritizing cost over quality.”

The report noted that many companies had frozen or slowed down hiring, reinforcing concerns that the job market is weakening as companies tighten their belts in the face of reduced customer demand.

“Seven districts noted that firms were hesitant to hire workers because of weaker demand or uncertainty,” the report said.

Report Could Encourage Fed To Cut Interest Rates

The report showed growing threats to the Federal Reserve’s two goals of keeping inflation low and employment high.

Some economists said the report’s detailed analysis of stagnating economic growth and a weakening job market could push Federal Reserve officials toward lowering their key interest rate when the central bank’s policy committee next meets in September.

Fed officials have kept rates flat, at a higher-than-usual level, this year in hopes of pushing inflation down to the Fed’s goal of a 2% annual rate. However, fears of a job market crash could propel them to cut interest rates to boost borrowing and spending and juice the job market. The fed funds rate affects interest rates on many business and consumer loans.

“The Fed’s latest regional economic update depicted a softening economy and labour market, which may go some ways to coaxing a rate cut later this month,” Sal Guatieri, senior economist at BMO Capital Markets, wrote in a commentary.

The report also highlighted another major concern of Fed officials: tariffs could worsen inflation. The Fed is trying to determine whether the tariffs will produce a one-and-done price hike or whether prices will continue to spiral upward.

“Most districts reported that their firms were expecting price increases to continue in the months ahead, with three of those districts noting that the pace of price increases was expected to rise further,” the report said.

The job market concerns seemed more salient to financial markets than the inflation red flags. According to the CME Group’s FedWatch tool, chances for a September rate cut rose to 96%, up from 93% the previous day. The tool forecasts rate movements based on fed funds futures trading data.