A Federal Reserve official indicated that significant uncertainty caused by President Trump’s tariffs has led some businesses to reduce hiring and spending, potentially slowing the economy. However, it remains uncertain if the central bank should reduce its key interest rate.
Tom Barkin, president of the Federal Reserve’s Richmond branch, observed that businesses are becoming cautious but have not yet resorted to severe job cuts typically associated with a recession.
Barkin described the situation as akin to driving in fog, noting, “That’s what I’m seeing on the business side. Hiring freezes, discretionary spending being cut back, but not major layoffs.” His remarks were made to the Loudoun County, Virginia Chamber of Commerce.
Barkin and other Federal Reserve representatives highlighted the complex challenge currently facing the central bank. If tariffs drive inflation, the Fed might maintain or increase rates. Conversely, if tariffs weaken the economy, a rate cut would typically be expected.
Federal Reserve Chair Jerome Powell stated the risks of increasing inflation and unemployment are growing. The Fed plans to wait for clearer economic signals before taking further action, after keeping its key rate unchanged for a third consecutive meeting.
President Trump has criticized Powell for not cutting rates, arguing that the economy no longer grapples with the high inflation that prompted the Fed to raise borrowing costs in 2022 and 2023.
Economists suggest that the primary reason for a potential rate reduction would be to counteract an economic slowdown caused by tariffs. Rising costs due to higher duties—impacting about half of imports used by American companies—might lead to widespread layoffs, elevating unemployment and risking a recession.
Gregory Daco, chief economist at EY, advocates for a rate cut, noting that the economy is decelerating and may edge towards a recession.
A critical issue for the Fed is assessing whether inflation or unemployment poses a more significant risk to the economy. Barkin stated it is premature to conclude that lower borrowing costs are essential for growth.
He explained the balancing act by saying, “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 is among the 19 officials involved in the Fed’s eight annual meetings regarding interest-rate policy, though only 12, excluding Barkin this year, are voting members.
Other Fed officials reiterated Barkin’s cautionary stance. Michael Barr, a member of the Fed’s Washington-based board of governors, expressed concern that tariffs could sustain inflation, potentially keeping the Fed on hold.
Barkin seemed to downplay inflation concerns, suggesting consumers may be unwilling to endure prolonged price increases, which might compel manufacturers and retailers to absorb tariff costs.
The original story appeared on Fortune.com.
