The Fed is having a ‘healthy debate’ about whether Trump tariff inflation will be transitory: Kashkari
From Yahoo Finance: 2025-05-27 12:17:00
Federal Reserve officials are debating whether inflation caused by Trump’s tariffs will be temporary. Minneapolis Fed president Neel Kashkari advocates for maintaining rates until there is more clarity on tariffs’ impact. Uncertainty surrounds trade talks, with Fed policymakers split on the potential outcomes on inflation and the economy.
The White House argues that tariff-induced price increases are temporary, while Trump calls for rate cuts. Fed officials are unsure of the effects of trade policies. The central bank faces a dilemma balancing stable prices and employment amid unknown economic impacts of White House policies.
Fed governor Chris Waller believes tariff-related inflation could be temporary, allowing the Fed to base policy on underlying trends. Successful trade negotiations could lead to a 10% effective tariff rate and 3% inflation. The Fed’s preemptive rate cuts provide time to monitor economic evolution.
A fresh reading on the Fed’s preferred inflation gauge, the “core” PCE index for April, is expected to show a slight decrease in year-over-year inflation. First quarter GDP contraction is expected to remain stable. Earlier this month, Fed policymakers voted to maintain benchmark interest rates, emphasizing uncertainty about the economic outlook.
Fed Chair Jerome Powell anticipates a divergence from the central bank’s goals for the rest of the year. President Trump’s tariffs are expected to generate higher inflation and slower growth, posing a dilemma for the Fed’s dual mandate of price stability and employment maximization. Clarity is needed before any rate adjustments.
Minneapolis Fed president Neel Kashkari stresses the importance of maintaining the policy rate to anchor long-run inflation expectations. Tariffs on final product parts could impact final prices over time. Elevated inflation in the US for four years raises concerns about losing inflation expectations’ anchor, supporting a modestly restrictive policy rate.