Federal Reserve Officials Advocate Caution on Interest Rates Amid Tariff Uncertainty

Another Federal Reserve official has advocated for a cautious approach in response to the tariff policies implemented by the Trump administration. The official suggested that the central bank should maintain its current stance on interest rates for an extended period to ensure that inflation remains stable. This perspective was shared during a speech prepared for the World Affairs Council of San Antonio.

The official highlighted that the tariff policies have not yet had a significant impact on inflation, as businesses have been stockpiling inventory in anticipation of the tariffs. Currently, these businesses are waiting to see the final outcome of the tariffs before passing on additional costs to consumers. The official emphasized the need to monitor summer and autumn data to better understand the impact of tariffs on overall prices. There is a possibility of a combination of softening inflation and a weakening labor market, which could necessitate a quick reduction in interest rates.

The official also noted that while tariffs could potentially drive up inflation, recent labor market data indicates a slight cooling. Additionally, the pessimistic outlook from businesses and households may signal a worsening economic outlook. However, the official cautioned that emotions are not a reliable indicator of economic conditions and that actual economic data should be the primary focus.

Since December of last year, the Federal Reserve has maintained its policy interest rate within the range of 4.25% to 4.50%. Most policymakers have indicated that they expect to keep rates unchanged for several more months, as they are concerned that tariff-induced price increases could disrupt the relatively mild inflation trends observed in recent months. The official also mentioned the latest June CPI data, noting that both overall and core inflation have increased. The official expressed a desire to see low inflation persist for a longer period to be more convincing.

At the same time, the official pointed out that the labor market is stable, and the U.S. stock market is near its historical highs. Fiscal policy appears to be providing a tailwind for economic growth, as Congress recently passed the "Big and Beautiful" bill, making Trump's 2017 tax cuts permanent and implementing a series of policies that could exacerbate the deficit. The official concluded that under these circumstances, monetary policy needs to remain tight for an extended period to ensure that inflation returns to its target level in a sustainable manner. Even with a moderately restrictive policy, the official believes that maximum employment can be maintained.

The official stressed that lowering interest rates too early could cause deeper economic damage and prolong the path to price stability. Conversely, lowering rates too late could further weaken the labor market. However, the official noted that the Federal Reserve has the option to further lower interest rates to bring employment back on track. The official summarized that the current monetary policy is well-positioned.

On the same day, another Federal Reserve official expressed similar views, stating that in the current economic environment, filled with uncertainty, there is no rush to change the central bank's benchmark interest rate. Despite widespread market expectations that Trump's tariffs would drive up inflation, the overall impact may not be as severe as initially feared.