Economic Uncertainty Due to Tariffs
In recent remarks, a key official from the Federal Reserve highlighted that the uncertainty stemming from President Donald Trump’s tariffs is affecting business decisions. Many companies are becoming more cautious, leading to a slowdown in hiring and spending, which could pose risks to the economy.
Tom Barkin, president of the Richmond Federal Reserve, noted that while companies are hesitant to commit to new hires, they are not yet resorting to significant layoffs. “It’s like driving through fog; it’s tough to see clearly,” Barkin explained during a speech to the Loudoun County Chamber of Commerce. Businesses are freezing hiring and cutting discretionary spending, but they haven’t reached the point of major job losses yet.
Barkin emphasized the difficult position the Federal Reserve finds itself in. If tariffs contribute to rising inflation, the Fed might keep interest rates high or even increase them. Conversely, if the tariffs lead to economic decline, rate cuts could be necessary.
Chair Jerome Powell mentioned that risks of both inflation and rising unemployment are growing. He stressed the importance of waiting for clearer signals from the economy before making any decisions, especially since the Fed has held its key interest rate steady for the last three meetings.
Trump has been vocal in criticizing Powell for not reducing rates, arguing that lower borrowing costs could benefit consumers and businesses. The former president believes the economy should no longer face the high inflation challenges that prompted previous rate hikes in 2022 and 2023.
Many economists suggest that a likely reason for the Fed to lower interest rates in the near future would be to mitigate a significant slowdown caused by the tariffs. With increased costs from higher tariffs, companies, especially those reliant on imported parts, may have to consider layoffs, which could drive unemployment up and risk pushing the economy toward recession.
Gregory Daco, chief economist at EY, expressed concern, stating that the economy is slowing and warned that recessionary pressures could be on the horizon. The Fed faces the tough task of deciding whether inflation or unemployment poses a greater threat at this moment.
Barkin cautioned that it’s premature to declare that lower interest rates are necessary to spur growth. He noted, “We’re seeing risks on both the inflation and unemployment sides, so prioritizing one over the other feels like guesswork.”
Barkin plays a role in the discussions surrounding interest rate policy, although he is not among the voting members this year. Other Fed officials echoed his cautious stance, with Michael Barr suggesting that tariffs could lead to prolonged inflationary pressures, which may keep the Fed in a holding pattern.
While some economists believe that the effects of tariffs might be temporary, Barr warned about potential disruptions to global supply chains, which could result in ongoing inflation. Conversely, Barkin commented that consumers might resist sustaining higher prices for an extended period, forcing companies to absorb the costs instead.
In summary, the Federal Reserve is grappling with the implications of tariffs, weighing inflation against potential job losses as it navigates these uncertain economic waters.
