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Investing.com -- U.S. central bank officials are finding it challenging to assess the underlying strength of the economy due to swift changes in trade policy and its impact on households and businesses, according to Federal Reserve Governor Adriana Kugler. Her comments came on Monday, following a day when U.S. and Chinese negotiators agreed to a temporary halt on their countries’ harshest tariffs for 90 days.
Kugler expressed that the current situation has clouded the Federal Reserve’s ability to predict future growth and inflation. While rising import taxes are expected to lead to higher prices and slower growth, the exact extent and duration of these effects remain uncertain. This uncertainty is compounded by ongoing negotiations between the Trump administration and other countries, while a broad range of levies is still pending.
The recent agreement between the U.S. and China to postpone the most severe tariffs led traders to anticipate fewer Federal Reserve interest rate cuts this year. This is because the reduced tariffs are perceived as a potential growth stimulant.
Kugler, in her prepared remarks for a Central Bank of Ireland event, stated, "It is currently hard to judge the underlying pace of growth of the U.S. economy." She noted that trade policies are evolving and likely to continue changing. Despite this, Kugler believes they will likely yield significant economic effects even if tariffs remain close to the currently announced levels. She also highlighted that the uncertainty surrounding these tariffs has already impacted the economy through front-loading, sentiment, and expectations.
Kugler pointed out that the contraction of U.S. economic output in the first quarter was skewed by an unprecedented surge in imports, while domestic consumption continued to grow. However, she suggested that the increase in domestic purchases might also have been inflated by households and businesses rushing to evade tariffs. This could potentially set the stage for reduced consumption in the future.
Due to the significant uncertainty and volatility surrounding the underlying economic policy, Federal Reserve officials have indicated they will likely maintain the central bank’s benchmark interest rate in the current 4.25%-4.50% range until the outlook becomes clearer.
Kugler supported last week’s decision to keep rates steady, citing the potential inflation risks and her view of the current policy stance as somewhat restrictive. She believes the current monetary policy is well-positioned to accommodate any changes in the macroeconomic environment.
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