By Minneapolis Federal Reserve President Neel Kashkari has issued a warning regarding the potential inflationary consequences of President-elect Donald Trump’s proposed tariff plan.
In an interview on CBS’ ‘Face the Nation’, Kashkari cautioned that while one-time tariffs “shouldn’t have an effect long run on inflation,” the risk lies in the potential for retaliatory actions from other countries.
The danger of a global trade war: a “tit for tat” scenario
Kashkari emphasized the concern of a “tit for tat” escalation, where one country’s tariffs trigger retaliatory measures from others, leading to a trade war.
“If there’s a tit for tat and it’s one country imposing tariffs and then responses and it’s escalating,” Kashkari explained, “That’s where it becomes more concerning, and, frankly, a lot more uncertain.”
This uncertainty poses a significant threat to the Fed’s ongoing efforts to control inflation.
Trump’s tariff plan: universal import taxes and a focus on China
During his first term, Trump initiated a trade war with China by imposing import taxes on Chinese goods, prompting retaliatory tariffs from China.
Trump’s current proposal calls for universal tariffs on all imports, with a particularly high rate of 60% on goods from China.
This aggressive approach has raised concerns among economists, Wall Street analysts, and industry leaders about the potential for renewed inflationary pressures, especially as inflation has only recently begun to subside from pandemic-era highs.
The Fed’s inflation fight: progress and uncertainty
“We’ve made a lot of progress in bringing inflation down,” Kashkari acknowledged.
“I mean, I don’t want to declare victory yet. We need to finish the job, but we’re on a good path right now.”
The Fed recently implemented its second consecutive interest rate cut, further loosening monetary policy as inflation approaches the central bank’s 2% target.
Kashkari indicated that another rate cut could be forthcoming in December, depending on the incoming economic data.
Fed independence: navigating political pressures
Trump’s other policy proposals, such as a sweeping immigration plan, also present uncertain inflationary implications.
The Fed is adopting a “wait and see” approach, carefully monitoring the potential economic effects before adjusting its policies.
Both Trump and prominent supporters like Tesla CEO Elon Musk have expressed a desire to influence Fed policy decisions.
However, the central bank views its political independence as crucial for making objective monetary policy decisions based solely on the health of the US economy, not political incentives.
Kashkari expressed confidence in the Fed’s ability to maintain its independence, stating, “I’m confident that we will continue to focus on our economic jobs. That’s what should be dictating what we’re doing and that is what’s dictating what we’re doing.”
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