(April 9): Federal Reserve (Fed) Bank of Minneapolis president Neel Kashkari said the central bank is less likely to lower interest rates in the face of tariffs given their inflationary impact, even if the economy begins to deteriorate.

Kashkari described President Donald Trump’s tariffs as “much higher and broader than expected”, adding he anticipates the levies will lower investment and economic growth as well as push up inflation “at least in the near term”.

“The hurdle to change the federal funds rate one way or the other has increased due to tariffs,” Kashkari wrote on Wednesday in an essay published on the Minneapolis Fed’s website. “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.”

Kashkari pointed to measures of near-term inflation expectations that have already begun to rise as well as the country’s years-long experience with elevated inflation as reasons the Fed may not be able to “look through” any tariff-driven price shocks. 

“Given the high inflation we have experienced in recent years, and the risk of unanchoring long-run inflation expectations, I believe our first priority must be keeping long-run inflation expectations anchored,” he said.

Policymakers have kept interest rates unchanged so far this year, and have signalled they are not in a hurry to further cut rates after delivering a full percentage point of reductions in the last few months of 2024. They have said the Fed is well positioned to assess how new policies — including the sweeping tariffs announced by the Trump administration last week — impact the economy.

Following the tariff announcement, many economists raised expectations that the Fed will cut interest rates later this year to shore up the economy. Futures markets show investors expect about four cuts this year, up from about three a month ago. Economists have also slashed growth forecasts and upped the likelihood that the US will enter a recession in the next year. 

Kashkari noted that the neutral rate of interest, where policy neither stimulates nor weighs on the economy, will probably fall in the short term as tariffs increase the prices of foreign goods for firms and elevated economic uncertainty reduces businesses’ desire to invest. 

That means monetary policy will effectively tighten even if the Fed doesn’t lower interest rates, Kashkari said, “reducing the immediate need to raise the federal funds rate to keep long-run inflation expectations anchored”.

The Minneapolis Fed chief did offer some insight into what might change his outlook. 

“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,” Kashkari said.

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