St. Louis Federal Reserve president Alberto Musalem said that even after President Trump’s 90-day trade truce with China, tariffs at their current levels could have a “significant” impact on the economy short term.
They could dampen growth, soften employment and have one-off effects on prices, he added while giving a speech in Minneapolis.
Yet Musalem noted that he believes central bank monetary policy is “currently well positioned” to respond to the impact of changes in trade policy, immigration, tax policy and deregulation.
“The range of possible economic outcomes for the next few quarters is wide,” said Musalem. “Economic policy uncertainty is unusually high.”
Many central bank policymakers have been warning about higher inflation, elevated unemployment, and slower economic growth this year due to tariffs imposed by Trump, who has kept tariff rates at 10% for most countries while his team negotiates custom trade deals for some of America’s largest trading partners. US and China on May 12 also lowered their duties for 90 days.
But even after that de-escalation, Musalem said, the tariffs “seem likely to have a significant impact on the near-term economic outlook.”
“On balance, tariffs are likely to dampen economic activity and lead to some further softening of the labor market. Tariffs are also likely to have direct one-off effects on the prices of imported final goods, indirect effects on the prices of domestically produced goods and services, and possibly second-round effects on inflation.”
One of the big questions facing central bank policymakers at the moment is whether the expected increase in prices triggered by Trump’s trade policies will be transitory or not.
The White House has argued that the Fed should view any increases as a one-time event, with Trump himself repeatedly calling for the Fed to lower rates, but many Fed officials have made it clear they are not sure which way things will go.
The uncertainty highlights the dilemma for the central bank as it tries to weigh both sides of its mandate — stable prices and maximum employment — at a time when the true effects of White House trade policies on the economy are still unknown.
Fed Chair Jerome Powell reiterated at a May 7 press conference that he would wait for greater clarity on the impact of Trump’s tariffs before deciding on a path for monetary policy going forward.
If trade negotiations do not soon permanently reduce tariffs and retaliation, and inflation moves higher while the job market softens, Musalem sees two possible scenarios for monetary policy depending on how long-lasting inflation turns out.
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