By Howard Schneider
PALO ALTO (Reuters) – The Fed should not commit to further interest rate cuts until it is clear whether the Trump administration’s tariff policies lead to persistent inflation or a less serious, one-time adjustment in prices, St. Louis Fed President Alberto Musalem said on Friday.
Musalem said he currently puts even odds on either of the two paths for inflation. In theory, tariffs should prompt a one-time price jump similar to the imposition of a tax; but coming off the heels of recent high inflation the effect could be longer-lasting, and may also be more persistent since the new levies hit intermediate goods, for example.
That’s a reason not to jump to conclusions, he said.
The Fed cuts its policy rate by a full percentage point last year but has not made a move since December, with the Trump administration’s tariff plans now posing the risk of renewed price pressures.
“It is possible that higher inflation will be short-lived and mostly concentrated in the second half of 2025, as businesses run down inventories and pass tariffs on new goods purchased onto customers as one-off price increases,” Musalem, a current voter on interest rate policy, said in remarks prepared for delivery at Stanford University’s Hoover Institution. “It is equally likely that inflation could prove to be more persistent.”
“Committing now to looking through the inflation impact of tariffs, or to an easing of policy, runs the risk of underestimating the level and persistence of inflation,” Musalem said. “Mistiming the policy switch can be costly for the public in terms of inflation and employment outcomes.”
It would still be appropriate to cut rates “if tariffs are sustained but inflation is short-lived, inflation expectations remain anchored, and economic activity is meaningfully slower,” Musalem said.
But right now all of those issues remain up in the air.
The Trump administration has not decided what the final tariff schedule will be, and the issue may be unresolved for months still to come.
Meanwhile, even though business and household confidence is falling, economic data on employment and inflation have yet to register much reaction to Trump’s efforts to reorder the global trading system.
That has been an argument in favor of the Fed keeping the policy rate intact, cited by officials this week when they unanimously agreed to maintain the rate in the current 4.25% to 4.5% range.
Officials have largely agreed that they will have trouble making a decision on further policy moves until an array of administration policy decisions have been finalized and the impact on the economy clarified.
(Reporting by Howard Schneider; editing by Diane Craft)
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