The escalating tariff tensions between the US and China have led to increased risks of high inflation and recession expectations. As the tariff war continues and people wonder whether the FED will cut interest rates in May, Minneapolis FED President Neel Kashkari explained how tariffs affect the FED's decision and the inflation situation. Kashkari said the Fed is less likely to cut interest rates in the face of tariffs, given the inflationary effects of tariffs. Kashkari called President Donald Trump’s tariff decision “much higher and broader than expected.” The Fed official added that he predicted the tariffs would reduce investment and economic growth and increase inflation “at least in the near term.” The highlights of Kashkari's statement were as follows: “The obstacles to changing the policy rate have increased due to tariffs. Even as the economy and labor market weaken, the bar is higher and there is time to cut interest rates. Any upward or downward reaction of monetary policy should not be ignored. Ignoring inflationary effects of tariffs is “too risky.” The first priority should be to keep long-term inflation expectations stable. In the short term, inflation will rise, purchasing power will decline, investment will probably fall and GDP will shrink due to tariffs. The announced tariffs are much higher and more comprehensive than expected, leading to a greater economic impact and confidence shock. Monetary policy is tightening on its own, reducing the need for immediate rate hikes. If the uncertainty is quickly cleared, I can reconsider my perspective. Keeping long-term inflation expectations stable should be the first priority.” The FED keeping interest rates constant in May is priced at 58.5%, while a 25 basis point cut is priced at 41.5%. *This is not investment advice. Continue Reading: How Will US Tariffs Affect Fed Rate Cuts? One of the Most Hawkish Fed Members, Neel Kashkari, Explained!
