(Reuters) -Federal Reserve Bank of Minnesota President Neel Kashkari said on Tuesday it is too soon to know how short-term borrowing costs may need to be adjusted for U.S. President Donald Trump’s tariffs and their expected impact on inflation and the economy.
Kashkari’s view is widely held by his colleagues and is likely to leave the Fed on hold at its rate-setting meeting in two weeks.
"It’s too soon to judge what’s going to happen to the path of interest rates," Kashkari told the U.S. Chamber of Commerce Global Summit in Washington.
While it is "logical" that tariffs alone would not reaccelerate inflation, recent high inflation means the Fed cannot ignore this risk, he said, noting that tariffs will likely also slow growth. That combination would create "tension" for the Fed, he said, since the U.S. central bank cannot fight rising inflation and rising unemployment at the same time.
Complicating matters is the extreme uncertainty around U.S. trade policy, Kashkari said. This could be resolved quickly if trade negotiations result in agreements, but until then, that is keeping households and businesses from spending and investing, another knock to economic growth, he said.
"There’s a level of anxiety, again, I haven’t seen since COVID hit," Kashkari said.
Asked about Trump pressuring Fed Chair Jerome Powell to cut interest rates, Kashkari said monetary policy independence is "foundational" to U.S. economic success. He pushed back against the assertion by Trump and others in his administration that the Fed is making policy decisions for political reasons.
Kashkari favored easier monetary policy during Democratic President Barack Obama’s second term and Trump’s first term, became hawkish during President Joe Biden’s tenure, is now "probably some place in the middle" on policy, he noted.
"My metamorphosis from dove to hawk to moderate, is that because of politics? No, that’s because of the economic environment changing, the data changing."
Kashkari previously ran as a Republican for governor of California, and worked for the Bush administration during the global financial crisis.
Powell, he said, keeps the Fed’s rate-setting committee laser-focused on the central bank’s two goals of price stability and full employment - not politics.
Additional pressure on the U.S. economy could come from the recent rise in Treasury yields and a weakening dollar, he said, as global investors reassess whether to keep investing in the United States, long the world’s preeminent destination for capital.
Reduced investment in the country would lower the trade deficit and raise borrowing costs for U.S. businesses and households over the long term, he said. This could limit the U.S. capacity to issue debt and reduce the dollar’s standing as the world’s reserve currency.
"If we’re no longer the economy that investors around the world say, hey, this is the preeminent competitive economy, then we probably have less runway," Kashkari said.
"I hope that America maintains its preeminent position in the global economy and therefore the dollar would maintain its role of preeminence as well."