Two senior officials of the Federal Reserve System (Fed), Governor Michael Barr and New York Fed President John Williams, reported that the new tax levels proposed by President Donald Trump could push inflation higher, increase unemployment, and slow down economic growth this year.
These statements reflect the Fed's difficult position in balancing its dual mandate. That is to stabilize prices and maximize employment amid the still unclear real impact of the White House's trade policy.
The warnings from these two officials are similar to the recent stance of Fed Chair Jerome Powell. On Wednesday, Mr. Powell stated that he would wait for clearer data on the impact of tariffs before deciding the next direction of monetary policy.
All members of the Federal Open Market Committee (FOMC) voted unanimously to maintain the benchmark interest rate in the range of 4.25% - 4.5%. This level was set since the end of 2024, after the Fed cut interest rates by a total of 1 percentage point last fall.
In a statement released on Wednesday, the Fed acknowledged that the degree of uncertainty regarding the economic outlook is "increasing," with "risks of higher unemployment and inflation" despite overall growth remaining "solid," despite declining net exports pulling GDP back in Q1 2025.
Meanwhile, the White House continues to pressure the Fed to loosen monetary policy in response to the risk of recession. President Trump has repeatedly urged the Fed to cut interest rates and continued to criticize Mr. Powell on Thursday in the Oval Office. Mr. Trump said that the Fed Chairman "does not want to cut interest rates because he has no sympathy for me." On social media, Mr. Trump even nicknamed Mr. Powell 'Too Late.'
Speaking at a conference in Iceland, Mr. Barr noted that the Fed could find itself in a difficult situation if inflation rises while the labor market deteriorates. However, he believes it is still too early to assess the specific impact of the tariff policy as the final tax levels have not yet been announced. According to him, the current interest rate is appropriate for flexible adjustments as the situation becomes clearer.
Governor Barr stated that higher tax levels will disrupt global supply chains and create prolonged inflationary pressure. He warned that businesses will need time to adjust their supply. This is particularly difficult for small companies due to limited access to credit and fewer alternative options.
Also at this conference, New York Fed President Williams stated that the US economy is facing a period of uncertainty, and that uncertainty will be a dominant feature of the economic outlook in the near future. He emphasized the importance of keeping inflation expectations stable during this period.
Mr. Williams predicts that economic growth will slow significantly this year. He acknowledged that although policymakers generally forecast that unemployment and inflation will rise together, the Fed is currently unable to determine the extent and timing specifically, making it hard to act early.
According to Yahoo Finance