Federal Reserve’s Stance on Economic Policies

By Howard Schneider and Ann Saphir

PALO ALTO, California (Reuters) – The Federal Reserve requires more time to analyze the economy’s response to U.S. President Donald Trump’s tariffs and policies, stated Cleveland Fed President Beth Hammack on Friday. She noted that much of the administration’s sweeping agenda remains unclear.

> “I stand ready to move whenever we have clear and convincing evidence, but … given the overall breadth of the policies that have been discussed and put in place, I think there’s a real question about what those impacts are going to look like, and so it may take longer,” Hammack said.

According to Hammack, there isn’t much data available before the Fed’s next meeting in June to set interest rates, highlighting the current dilemma. While recent data indicated a 0.3% annualized contraction in the U.S. economy last quarter, analysts feel this is not a definitive indication of direction due to trade policy distortions. Hammack believes the economy remains resilient, maintaining that it’s too early to predict its future trajectory.

> “It is all premature to me — I think everything is very fluid and I think we need to really wait and see how the data play out,” she mentioned.

Despite acknowledging the strong job market with an unemployment rate at 4.2%, Hammack pointed out potential risks due to businesses preparing for the consequences of new tariffs. If tariffs lead to limited price increases and economic weakening, the Fed would prioritize the employment aspect of their mandate.

This week, the Fed retained short-term interest rates in the 4.25%-4.50% range, unchanged since December. While tariffs increase the risk of inflation and unemployment, Fed Chair Jerome Powell remarked that the extent and duration of these impacts are still unclear. Ongoing trade negotiations and the uncertain scope of tariffs further complicate the situation.

Contacts in Hammack’s district have begun making contingency plans to reduce their workforce if demand declines; however, businesses are currently retaining employees after experiencing hiring challenges in recent years. “People don’t know which way it will settle out,” Hammack said.

On inflation, Hammack noted that tariffs might lead to one-time price increases, but some businesses plan to adjust prices gradually as they determine their expected import tax levels, a process that could extend into summer. Prolonged uncertainties risk making inflation persistent, necessitating a tighter Fed policy.

Overall, Hammack expressed that uncertainty related to government policies clouds the economic outlook, heightening the risks of inflation, slower growth, and labor market softening. “Given the economy’s starting point, with inflation still elevated and with both sides of our mandate expected to be under pressure, there is a strong case to hold monetary policy steady at its current modestly restrictive setting,” she stated in her conference remarks.

In conclusion, she emphasized that maintaining the current course is the best approach for the Fed as it navigates the potentially conflicting challenges ahead.

> “It’s important for us to sit back and ensure we’re considering all different policies, as they operate in different directions. The spending policies, deregulation, all of these tariffs could yield varying consequences. Therefore, we must look at the situation holistically.”