Federal Reserve officials are prepared to hold their policy rate steady to minimize the risk that President Donald Trump’s tariffs trigger a persistent rise in inflation, even if the labor market softens further.
In public comments and interviews, a number of officials have sent a clear signal they are ruling out interest-rate cuts that would act as an insurance policy against any tariff-induced economic slowdown.
Policymakers are instead doubling down on their commitment to keeping inflation and Americans’ expectations for price growth in check, a posture that will likely keep them on hold absent a significant rise in unemployment.
“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,” Minneapolis Fed President Neel Kashkari wrote in an essay released Wednesday morning. “The hurdle to change the federal funds rate one way or the other has increased due to tariffs.”
Chair Jerome Powell said Friday the central bank doesn’t need to be in a hurry to make any policy moves as they assess the impact of Trump’s fast-changing trade policies.
With financial markets in turmoil since his April 2 unveiling of new import levies, Trump on Wednesday walked back plans to impose so-called reciprocal tariffs on a number of US trading partners.
In an interview with Bloomberg News on Wednesday afternoon, Federal Reserve Bank of Cleveland President Beth Hammack said she, too, was committed to being patient.
“It’s a really active choice on our part that we really need to see where things are going to go,” Hammack said. “I would much rather wait and move in the right direction than move quickly in the wrong direction.”
Speaking Thursday, Dallas Fed President Lorie Logan and Kansas City Fed chief Jeff Schmid each said they were focused on containing inflation in the wake of tariffs.
“There is a growing possibility that in setting policy, the Fed will have to balance inflation risks against growth and employment concerns,” Schmid said. “When contemplating this balance, I intend to keep my eye squarely focused on the outlook for inflation.”
St. Louis Fed President Alberto Musalem and Fed Governor Adriana Kugler have also stressed the need to address inflation. Officials have said they’ll continue to monitor unemployment, but at the moment they see the labor market as on solid ground.
Trump Shift
Under Trump’s latest tariff plan, most countries will face a lower 10% baseline rate, giving room for them to negotiate a permanent deal. US stocks rallied sharply on the news.
But by maintaining high barriers on Chinese goods — which he raised to 125% — Trump assured the overall weight of tariffs on imports was little changed. Bloomberg Economics estimated that lifting the duties on China to 125% and reducing all others to 10% would lower the average US tariff rate to 24%, from 27%.
What Bloomberg Economics Says:
“If we are understanding correctly, the latest announcement shifts tariff rates between countries a lot — but leaves the average US tariff rate only a little reduced, and still at a historic high.”
—Rana Sajedi, Maeva Cousin and Tom Orlik.
New data released Thursday showed consumer prices unexpectedly cooled last month, and the Fed’s favored measure of underlying inflation declined to 2.8% in the year through March, according to the Bureau of Labor Statistics.
Still, many analysts continue to expect the administration’s increased use of tariffs will bring both higher inflation and slower economic growth.
The Fed’s wait-and-see stance is motivated by several factors. Officials want to guard against the possibility that any tariff-related pickup in inflation becomes long-lasting. Powell has said that while tariffs are highly likely to generate a temporary rise in inflation, it’s also possible that the effects could be more persistent.
“Powell probably has his eye on the prize: continued price stability,” said Derek Tang, an economist at LH Meyer/Monetary Policy Analytics in Washington. “He certainly is unwilling to put a safety net under a recession that actually hasn’t happened.”
Tang estimates the Fed won’t cut rates this year. “Longer-term inflation expectations have been quite stable. The issue is how long can they remain stable when you have a price shock,” he said.
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