Federal Reserve's Kashkari: Economy faces blow as tariffs spark inflation concerns
Federal Reserve Bank of Minneapolis President Neel Kashkari on Wednesday said that the sweeping tariffs announced last week threaten to unanchor inflation expectations even as they deal a blow to the U.S. economy, leaving the door open to a policy rate change either up or down even as the hurdle for doing anything has risen.
"Given the paramount importance of keeping long-run inflation expectations anchored and the likely boost to near-term inflation from tariffs, the bar for cutting rates even in the face of a weakening economy and potentially increased unemployment is higher," Kashkari said in an essay released by the bank.
"On the other hand, given that the demand for investment capital will likely be lower and push short-run r-star down, policy is getting somewhat tighter on its own, reducing the immediate need to raise the federal funds rate to keep long-run inflation expectations anchored."
Those forces, he said, leave the Fed in a holding pattern for now.
"The hurdle to change the federal funds rate one way or the other has increased due to tariffs," he said. "As recent weeks have reminded us, nothing is certain and no monetary policy response, up or down, should be completely off the table."
U.S. President Donald Trump's decision last week to impose stiff and sweeping tariffs has triggered an escalating trade war and a global stock market rout due to worries about an economic downturn. On Wednesday China announced it would impose an 84% tariff on U.S. goods, after Trump raised U.S. tariffs on China to 104%.
With the tariffs much higher and broader than expected, Kashkari said, the impact on the economy and confidence will also be bigger, and will lead to higher prices, lower investment, and less economic output. At the same time, with inflation recently higher, the risk that inflation expectations could rise and lead to a persistent march up in prices has increased notably, he said.
The Fed has kept its policy rate at 4.25%-4.50% since last December, and policymakers have said they are in no hurry to adjust rates further. Kashkari's remarks are the bluntest yet to make that point, but are particularly remarkable in that they explicitly raise the possibility of a rate hike.
Financial markets have been betting heavily that the Fed's response to tariffs will be a series of rate cuts, starting as soon as next month.
Reporting by Ann Saphir; Editing by Andrea Ricci