Federal Reserve Bank of Minneapolis President Neel Kashkari has cautioned that the U.S. central bank’s battle against inflation could become increasingly complicated. This is due to ongoing trade policy uncertainty and the potential long-term effects of President Donald Trump’s tariffs. In a speech at a Bank of Japan (BOJ) conference in Tokyo on Monday, May 27, Kashkari said the Fed should be “very patient” when considering increases in short-term interest rates because the current economic situation is anything but normal. He underscored the dilemma facing policymakers: whether to seek to counter the inflationary pressures created by tariffs or to safeguard economic activity while not stoking further inflation. Prolonged tariffs could establish a higher inflation risk, and on the other hand, should there be a quick resolution, one can expect stagflationary pressures to subside, said Kashkari Kashkari supports the policy rate as it is to guard against inflation Recent tariffs and continuing trade discussions have created uncertainty for US consumers and businesses. As a reaction, several individuals have put aside significant spending and investments until they can see how the policies will turn out. This action has left policymakers unsure of how tariffs and other changes will ultimately affect the economy. Based on Kashkari’s argument in prepared remarks, negotiations are not the preferred step. He claimed that negotiations could take months or years to be fully resolved, and levies on intermediate goods take time to pass. At the same time, the risk of inflation expectations could rise over time, urging a more effective approach. Therefore, according to Kashkari, the effective approach to curb this is to keep the policy rate as it is, which is currently only slightly restrictive, until they understand tariffs and how they would affect prices. He further claimed that he found this more convincing because he believes it is very important to protect long-term inflation expectations. In this situation, the Fed is taking a “ wait-and-see ” approach until it receives more information, Kashkari mentioned, adding in an interview that he was not certain if the situation would be clear enough for Fed officials by their policy meeting in September. So far this year, Fed officials have kept rates the same at all three meetings and are expected to do so again at their next meeting in June. This follows a total cut of one percentage point in the last three months of 2024. Notably, Kashkari is not part of the Federal Open Market Committee voting group that decides on policy this year. Economists anticipate Trump’s tariffs to worsen inflation risks Economists have also pitched their perspective on the matter. According to their assertions, tariffs tend to increase inflation , but the extent depends on the size of the tariffs and how much other countries retaliate. They also caution that tariffs could eat into economic expansion, lead to job losses, and even drag the country into stagflation. That would leave the Federal Reserve with an unappetizing choice of either keeping interest rates high to contain inflation or cutting them to lift a weakening economy at the risk of adding to the inflation problem. Kashkari said last month that the Fed ensures that tariffs do not create a sustainable inflation issue. He echoed the statement of some of his colleagues that since inflation has run high for several years, the central bank may need to aim to bring prices down rather than keep raising the labor market to solve the serious inflation problem. Another way to tackle this is to keep consumers’ long-term price expectations aligned with the Fed’s 2% inflation target. Policymakers are closely monitoring this situation. One survey indicates that expectations for price increases over the next five to ten years are at their highest since 1991, while other measures still show expectations are near the Fed’s 2% goal. Meanwhile, Kashkari reminded his audience at the BoJ event that inflation in the US has been above their 2% target for four years. He then concluded with the question, “How long can we have high inflation before long-term inflation expectations become unstable?” Your crypto news deserves attention - KEY Difference Wire puts you on 250+ top sites
