WASHINGTON — Concerns amid escalating tariffs by President Donald Trump have instigated significant uncertainty, prompting some enterprises to tighten the reins on hiring and expenditures, potentially impeding the economic momentum, according to a high-ranking official from the Federal Reserve, as stated on Friday. It remains to be seen if this ambiguity is enough reason for the central bank to adjust its primary interest rate.
Tom Barkin, president of the Richmond branch of the Federal Reserve, indicated that firms have adopted a more cautious stance, although they haven’t resorted to drastic measures like substantial job cuts synonymous with a recession. “Driving in foggy conditions is challenging,” Barkin described to the Loudoun County, Virginia Chamber of Commerce. “This reflects the current business atmosphere: hiring freezes, trimming discretionary budgets, but no significant layoffs.”
Challenges remain for the Fed amidst these tariffs. They complicate decisions on interest rates—raising them if inflation spikes or considering cuts if there’s an economic decline. On Wednesday, Fed Chair Jerome Powell noted the growing threats of increasing inflation and higher unemployment, highlighting the need for clarity on economic trajectories before further decisions. This follows the Fed’s move to maintain the interest rate steady for the third consecutive meeting.
President Trump continues to pressure Powell for rate reductions, suggesting that lower rates could ease borrowing for both consumers and businesses. Trump argues the absence of high inflation permits a cut, despite the substantial rate hikes from 2022 and 2023. Yet, the looming reason for potential rate cuts would be counteracting an economic downturn triggered by tariffs. As tariffs elevate costs — primarily for parts used by American manufacturers — fears rise that companies may resort to layoffs, thus exacerbating unemployment and inviting recession risks.
Gregory Daco, chief economist at EY, advocates for rate cuts soon, believing that “the economy is slowing and on the verge of a recession.” The principal dilemma facing the Fed is discerning which risk poses a greater threat: inflation or unemployment.
Barkin maintains it’s premature to claim that reducing borrowing costs is necessary for spurring growth. “There’s risk on both the inflation and unemployment fronts. Declaring one more significant seems speculative,” he remarked.
Barkin is among the 19 officials participating in the Fed’s bi-monthly meetings on interest-rate policies, with voting limited to 12 members of which he isn’t a part this year.
Echoing Barkin’s caution, Michael Barr from the Fed’s board of governors in Washington suggested tariffs might sustain inflation pressures long-term, leaving rates on hold. This contrasts some economists who believe price increases to be temporary under tariffs.
“Extended inflation from higher tariffs could disrupt global supply chains, maintaining inflationary pressures,” Barr commented during Friday’s conference in Reykjavik, Iceland. However, Barkin offered a different take, hinting that financially stretched consumers might resist higher prices, compelling businesses to absorb tariff-induced costs. “While passing on costs sounds feasible, practical execution might prove challenging,” Barkin concluded.