WASHINGTON (AP) — A top Federal Reserve official said Friday that massive uncertainty created by President Donald Trump’s tariffs has caused some businesses to cut back on hiring and spending, threatening to slow the economy, but he added that it’s not yet clear whether the central bank should cut its key interest rate.
Tom Barkin, president of the Federal Reserve’s Richmond branch, said businesses have turned cautious, though are not yet engaging in steep job cuts or other behavior typical of a recession.
“The way I’ve been describing it is, it’s really hard to drive when it’s foggy,” Barkin said in remarks to the Loudoun County, Virginia Chamber of Commerce. “That’s what I’m seeing on the business side. Hiring freezes, discretionary spending being cut back, but not major layoffs.”
Barkin and other Fed speakers Friday underscored the difficult challenge the central bank faces right now. If the tariffs push up inflation, the Fed would keep rates elevated — or raise them further. But if the duties worsen the economy, the Fed would typically cut rates.
On Wednesday, Chair Jerome Powell said the risks of higher inflation and higher unemployment are rising and that the Fed would wait for greater clarity about where the economy is headed before making its next move. Powell spoke after the Fed kept its key rate unchanged for the third straight meeting.
Trump, however, has continued to assail Powell for not cutting rates, which over time could lower borrowing costs for consumers and businesses.
Trump is pushing for rate cuts because he argues that the economy no longer suffers from the high inflation that spurred the Fed to sharply raise borrowing costs in 2022 and 2023.
But the most likely reason for the Fed to reduce its key rate in the coming months, economists say, would be to offset a sharp slowdown in the economy stemming from the tariffs. As companies see their costs rise because of higher duties — about half of imports are parts used by American companies — they could institute widespread layoffs, pushing up unemployment and risking recession.
Gregory Daco, chief economist at EY, a consulting firm, said he thinks the Fed should cut rates soon because “the economy is slowing and will continue to slow and flirt with the recession.”
A key challenge for the Fed right now, however, is determining which risk is bigger for the economy, inflation or unemployment.
Barkin said it was too early to say that lower borrowing costs are needed to boost growth.
“We have risks on the inflation side, and if you see as I see that we have risks on the unemployment side, then declaring that one risk is more significant than the other right now feels almost like guessing,” Barkin said.
Story Continues
