St. Louis Fed President Alberto Musalem cautioned that even with the 90-day trade truce between the US and China, the current level of tariffs could still have “significant” short-term effects on the economy.
In a speech overnight, he warned that tariffs are likely to “dampen economic activity” and further weaken the labor market. At the same time, tariffs could raise inflation both directly, through higher import prices, and indirectly, by triggering broader cost increases in domestic goods and services.
Musalem outlined two potential monetary policy responses depending on how persistent the inflationary effects of tariffs prove to be.
If the price impacts are temporary and inflation remains controlled, then it may be appropriate for the Fed to “look through” the short-term inflation spike and consider easing policy to cushion the labor market.
However, if inflation proves stickier and starts to unanchor long-term expectations, Musalem argued that restoring price stability should take precedence, even at the cost of weaker growth and higher unemployment.
“History tells us that restoring price stability is more costly for the public… if inflation expectations are not well anchored,” Musalem said.
