A senior official from the US central bank has cautioned that interest rates might need to be slashed more aggressively than initially anticipated if President Donald Trump’s steep tariffs on imports remain in place for an extended period, as they pose a significant risk of slowing down the economy and driving up unemployment.
Trump introduced sweeping tariffs in early April, targeting most of the US’s trading partners in an effort to address what Washington deems unfair trade practices. These tariffs include a 10 percent global levy and higher, country-specific rates, particularly on goods from China.
The higher tariffs on countries other than China have been temporarily paused for 90 days, but if implemented, they would push the effective average US tariff rate up to 25 percent.
Even with this pause, the overall average tariff rate still hovers around 25 percent due to the substantial tariffs already imposed on Chinese goods.
If this level of tariffs is maintained for a significant duration, “economic growth is likely to slow to a crawl and significantly raise the unemployment rate,” Federal Reserve governor Christopher Waller stated at an event in Missouri on Monday, according to the prepared text of his remarks.
Waller anticipates that the elevated inflation “would be temporary,” but he noted that it could peak as high as five percent in the near term. He also warned that the effects “on output and employment could be longer-lasting.”
“If the slowdown is significant and even threatens a recession, then I would expect to favour cutting the FOMC’s policy rate sooner, and to a greater extent than I had previously thought,” he said, referring to the Federal Open Market Committee, the Fed’s rate-setting body.
He further explained that in this scenario of a rapidly decelerating economy, the risk of recession would likely outweigh the risk of escalating inflation.
The US central bank has kept interest rates steady in the range of 4.25 to 4.5 percent since the beginning of this year.
On Friday, the Trump administration temporarily exempted certain products, including smartphones, laptops, and chip-making equipment, from the “reciprocal tariffs.” This provided a temporary reprieve from both the 10 percent global rate and the 125 percent levy on goods from China.
However, many other tariffs remain in effect, including a pre-existing 20 percent tariff on imports from China due to its alleged role in the fentanyl supply chain, as well as levies on steel and aluminum imports.
