Fed Officials Keeping Monetary Policy Sidelined in Face of Tariff War

– Barkin: Economy ‘In Very Dense Fog’; Fed Must Handle With ‘Judgment’

– Kashkari: Bar for Rate Cuts Has Risen Due to Inflation Concerns

– Musalem: Bar for Cutting Rates Higher As Both Inflation, Recession Risks Up

– Daly: Fed Must ‘Tread Slowly and Tread Carefully”

By Steven K. Beckner

(MaceNews) – Federal Reserve officials remain reluctant to conclude that President Trump’s tariff campaign and related financial market disruptions require the Fed to adjust monetary policy, even as Trump himself pressures the Fed to lower interest rates.

In the past few days, multiple Federal Reserve Bank presidents have spoken with concern about the escalating international trade war, but with very little certainty about the appropriate policy response. They just don’t know at this stage how tariff hikes and overseas reactions to them will affect the Fed’s two goals of “maximum employment” and “price stability.”

Richmond Federal Reserve Bank President Thomas Barkin, speaking after sometimes steeply higher Trump tariffs went into effect, said the economy has gone from a period of prosperity into “a very dense fog,” which he said leaves the Fed with “a delicate problem” that it must “handle with judgment.”

Minneapolis Fed President Neel Kashkari warned tariffs could cause a recession in an essay published by his Bank Wednesday, but nonetheless said the bar for cutting rates has risen due to simultaneous inflation worries.

St. Louis Fed President Alberto Musalem said tariffs threaten to present both downside risks to growth and upside risks to inflation, creating a “tension” between the Fed’s two mandates that it will have to confront with a “balanced approach.”

On Tuesday, San Francisco Fed President Mary Daly was upbeat about the economy despite  uncertainty about the outlook and recent turmoil in financial markets generated by the Trump administration’s trade policies, but said the Fed must “tread slowly and tread carefully” as it seeks to gain greater “clarity” before making any monetary policy changes.

And Chicago Fed President Austan Goolsbee expressed concern about how tariff “anxiety” might affect the economy and in turn monetary policy in coming months.

These comments are largely consistent with what Fed Chair Jerome Powell said last Friday, as financial markets melted down despite a relatively strong March employment report. He said

the Fed needed to wait for more “clarity” on the economic effects of the Trump administration’s trade and other policies before adjusting monetary policy.

Because of “high uncertainty” about the outlook and because the economy was still “in a good place,” Powell repeated that the Fed’s policymaking Federal Open Market Committee does not need to be “in a hurry” to change its interest rate settings.

After cutting the federal funds rate by 100 basis points in late 2024, the FOMC left the policy rate unchanged for the second straight meeting on March 19 in a target range of 4.25% to 4.5%.  The 19 FOMC participants projected the policy rate will end 2025 at 3.9% (a range of 3.75% to 4.00%) in the quarterly Summary of Economic Projections – the same as in the December SEP.

While leaving rates steady, the FOMC scaled back the pace of “quantitative tightening,” reducing the amount of Treasury securities that are allowed to run off each month from $25 billion to $5 billion.

Since its March meeting, the Fed’s preferred inflation gauge, the core price index for personal consumption expenditures (PCE) was reported up a worse than expected 2.8% in February from a year earlier. And Trump’s tariff policies have amplified inflation concerns and lifted inflation expectations.

On the “maximum employment” side of the Fed’s dual mandate, non-farm payrolls rose a better than expected 228,000 in March, while the unemployment rate rose a tenth to 4.2%. But a decline in consumer confidence have increased fear of weaker consumer spending, slower economic growth and higher unemployment. In its latest GDPNow forecast, the Atlanta Federal Reserve Bank estimated real GDP contracted by 2.4% in the first quarter.

Since Trump announced his “Liberation Day” campaign of sometimes punitive “reciprocal tariffs” on April 2, some 70 countries are said to have pleaded for negotiations with the United States, but China and Europe have retaliated, with the former announcing tariffs of 104% on U.S. exports. Financial markets have been shaken. Stocks have plunged, along with the U.S. dollar.

Although he has largely brushed off the economic consequences of the trade war, Trump has tweeted, “This would be a PERFECT time for Fed Chairman Jerome Powell to cut Interest Rates. He is always ‘late,’ but he could now change his image, and quickly.’”

So far, Fed officials aren’t taking the hint.

Despite the commotion on Wall Street, Fed officials have spoken with relative equanimity, giving little indication that they are inclined to change policy when the FOMC next meets May 6-7.

Barkin observed that “things were in pretty good shape” before the tariff increases, but said, “what’s happened since then is there’s this deep fog of uncertainty surrounding business and increasingly consumers.”

“There are so many possible outcomes” that there is “no clarity” on the outlook for the economy and monetary policy, Barkin told the Economic Club of Washington.

Trump’s trade policies and how other countries are reacting to them could increase both inflation and unemployment, and that would present “a delicate problem for the central bank,” he said.

If that situation eventuates, Barkin said the Fed would have to “handle it with judgment” and with “insight as to how far you are away” from both the inflation and unemployment targets and how much time it will take to get to the targets.

“We’re living in a world with very dense fog…,” he said, and he used a driving analogy to describe how he thinks the Fed should navigate this fog: Rather than speed up, or apply the brakes, a driver should pull his car over to the side and put on the hazard lights.

Barkin said he will be watching consumer spending “most closely” because “the thing you want to worry about is: are you close to a moment when consumers in unison try to pull back.”

For now, “consumers are still spending…,” he said. “That’s the thing we’re watching…that’s the trigger on the economy…”

He cast doubt on measures of consumer confidence, saying that actual spending has continued even as confidence has fallen. But he said other measures, such as airline travel and other discretionary spending have shown signs of softness.

Barkin said consumer spending is in “a cage match between emboldened sellers and exhausted consumers.”

Kashkari minced few words in writing about the tariff war in his essay. He said, “the shock to confidence could potentially have an even larger effect on the economy than the tariffs themselves …., potentially leading to a meaningful slowdown in economic activity, perhaps even to a recession.”

At a minimum, he warned, “Real purchasing power for consumers and firms will go down. Investment will likely be lower because the prices paid for imported capital goods will be higher. GDP growth will be smaller. Unemployment could be higher.”

If the FOMC were to merely “look through” the inflationary effects of higher tariffs, he said “that would imply a somewhat lower path for monetary policy,” Kashkari wrote, but in the current context “our first priority must be keeping long-run inflation expectations anchored….”

“Hence, adopting a simple look-through policy could be too risky for the economy,” he continued, pointing to “a sharp move upward in measures of near-term inflation expectations that is important to watch.”

So, Kashkari maintained that “the hurdle to change the federal funds rate one way or the other has increased due to the tariffs.”

“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…,” he went on, cautioning that “the risk of unanchoring inflation expectations seems to have increased notably.”

But neither is there a compelling case for raising rates, according to Kashkari, who argued that monetary policy “is getting somewhat tighter on its own,” particularly because the “r*” “neutral” rate has fallen.

Kashkari ended on an ambivalent note, implying the FOMC should stand pat in a wait-and-see posture. “(N)othing is certain and no monetary policy response, up or down, should be completely off the table.”

“Going forward, I will be paying close attention to further trade policy announcements from U.S. authorities and our major trading partners, to indications of expected inflation, and to the traditional measures of economic activity, actual inflation and employment,” he concluded. “Either a rapid resolution of trade policy uncertainty or a sharper than expected downturn could lead me to revise my outlook for appropriate monetary policy.”

Musalem echoed Kashkari in saying that “looking through” tariff-related price increases would be “risky,” but otherwise did not overtly lean toward any particular monetary policy stance in a Reuters interview.

“I’m seeing a high degree of uncertainty…I’m seeing low and declining confidence by households and businesses,” the FOMC voter said. “I’m seeing the actual impact of tariffs now will raise prices that will lower real incomes of people and of businesses, and I’m also seeing retaliation from some trading partners.”

“All of those suggest downside to growth, on the upside to inflation,” he added,

Musalem acknowledged that the divergent impacts of tariffs present a dilemma for the Fed. “You’re getting risk on both sides materializing,” he said, adding that the FOMC is facing “tension now between our two objectives going forward.”

Musalem said his “own posture is going to be very vigilant going forward about those two types of risks,” and to pursue a “balanced approach” as long as inflation expectations don’t worsen.

A day earlier, Daly largely echoed Powell’s recent cautious approach to monetary policy as she answered questions at the Brighham Young University Marriot School of Business after meeting with  Utah business leaders earlier Tuesday, 

She said she “walked away with a good feeling” from the CEOs, saying the picture is one of “overall solid growth, a solid labor market, inflation starting to edge down…”

But Daly added she is “worried (inflation) might edge back up, at least temporarily, due to tariffs.”

“For several yeasrs now, we’ve been struggling with our price stability goal,” she said, adding that, although “we’ve made a lot of progress,” inflation is still “close to 3% (and) that’s still not price stability.”

Again echoing Powell, Daly said both business leaders and Fed policymakers face a lot of uncertainty – not just about tariffs, but also about tax policy, regulatory policy and immigration policy. While tax and regulatory poicies should be “conducive to growth,” trade and immigration policy may not.

In such a climate of uncertainty, she cautioned that “jumping to a conclusion … is a recipe for  disaster.”

Daly said the Fed has a difficult task of assessing the size and scope of tariff impacts in a fast changing situation. She noted that, just that morning, news had come out that 70 countries were entering into tariff negotiations with the United States.

“So we don’t have complete clarity…,” she said, repeating that the Fed must not to “jump to decisions right now.” Rather, it must “study” on the tariff war plays out.

And Daly said the Fed has the luxury of waiting to see how things unfold in the trade arena.

“We’ve got policy in a very good place right now,” she said, adding that after cutting rates  100 basis points last year, “monetary policy is moderately restrictive but not so restrictive that the economy is vulnerable.”

Therefore, Daly added, “With growth good and policy in a good place, we have built the time and the ability to just tread slowly and tread carefully,”

Meanwhile, voting Chicago Fed President Goolsbee told Illinois public radio that tariffs have been “way bigger” than modeled, leaving the Fed unsure about their economic impact.  But he said “the anxiety” about tariffs threatens to “take us back to a thing (inflation) we spent the last five years desperately trying to get away from.”