Kashkari says monetary policymakers should primarily focus on any employment reduction in face of tariffs

Investing.com -- Neel Kashkari, the President and CEO of the Federal Reserve Bank of Minneapolis, recently discussed the potential implications of the newly announced tariffs on the path of monetary policy. In an essay published on April 9, 2025, Kashkari explained that while the Federal Reserve doesn't directly handle trade policy, it must consider trade factors when analyzing the U.S. economy's trajectory to fulfill its dual mandate of stable prices and maximum employment.

Kashkari shared his observations at a public town hall in Detroit Lakes, Minnesota, on March 26. He noted that concerns about tariffs and possible trade conflicts have resulted in a significant drop in confidence, the largest since the COVID-19 outbreak in the U.S. in March 2020. This loss of confidence could have a larger impact on the economy than the tariffs themselves, as it could lead to reduced spending and investment, potentially causing a significant economic slowdown or even a recession.

While the final size of the tariffs, their duration, and other countries' responses are still uncertain, the initial package of tariffs announced on April 2 was larger and broader than expected. This resulted in a larger direct economic effect and a bigger shock to confidence.

In the short term, Kashkari explained, tariffs function similarly to a consumption tax on American consumers and businesses. This could lead to increased prices and inflation, reduced purchasing power, lower investment due to higher costs for imported capital goods, smaller GDP growth, and potentially higher unemployment.

Kashkari argued that monetary policymakers should primarily focus on any employment reduction, implying a somewhat lower path for monetary policy. However, given the recent high inflation and the risk of unanchoring long-run inflation expectations, he highlighted the importance of keeping these expectations anchored. He warned that adopting a simple look-through policy could be too risky for the economy.

The tariffs' effects on the neutral real interest rate, or r, which balances savings and investment in the economy, are unclear in the long run. However, in the short term, r is likely to decline due to higher prices for imported capital goods and increased economic uncertainty reducing firms' desire to invest.

Kashkari concluded that the tariffs have increased the hurdle to change the federal funds rate. The need to keep long-run inflation expectations anchored and the expected boost to near-term inflation from tariffs make it harder to cut rates, even if the economy weakens and unemployment rises. He emphasized that no monetary policy response should be completely off the table and that he will closely monitor further trade policy announcements, expected inflation, and traditional measures of economic activity, actual inflation, and employment.

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