The erosion of Americans’ confidence over the past two months could be worse than the tariff situation, Minneapolis Federal Reserve President Neel Kashkari says.
Various business and consumer surveys have indicated collapsing confidence about future economic conditions, from the labor market to inflation.
The reports largely reveal the same theme: Companies and households are worried about the adverse effects of tariffs.
“I’ve been at the Fed for 10 years, and this is the most dramatic shift in confidence that I can recall, except for when COVID hit in March of 2020,” Kashkari said at the Detroit Lakes Chamber Economic Summit on March 26.
The regional central bank chief stated that a sharp decline in confidence, fueled by uncertainty surrounding the new administration’s trade policy changes, could be worse than the tariffs.
“That makes me nervous,” he said.
“If everybody in this room is nervous as a consumer and as a business, and everybody pulls back at the same time, that can dramatically weaken the economy.”
Despite the quick reversal in post-election optimism, Kashkari thinks it could be restored if the United States and major trading partners resolve trade uncertainties immediately.
“So I take it very seriously, but I don’t know how long it’s going to last,” the Fed official said.
Until these policy adjustments provide greater clarity, Kashkari believes the Fed’s rate-cutting cycle needs to be on hold.
He also plans to impose tariffs on lumber, pharmaceuticals, and semiconductors.
According to the Minneapolis Fed head, it is a balancing act.
On the one hand, tariffs could push prices up, forcing the central bank to keep interest rates high. However, levies could slow economic growth, sending rates lower.
“I look at those two things, I think, OK, just kind of a wash,” he said. “Just sit where we are for an extended period of time until we get clarity.
“I guess I share the uncertainty as we’re trying to analyze and forecast the economy. I’m uncertain, too.”
This month, the Fed left the policy rate unchanged at a range of 4.25 percent to 4.5 percent for the second straight meeting.
However, while the updated Summary of Economic Projections indicated monetary policymakers forecasting higher inflation and lower growth, they are still projecting two quarter-point rate cuts this year.
Federal Reserve Chair Jerome Powell, speaking to reporters at the post-meeting press conference earlier this month, stated that tariffs could delay the progress on inflation. However, any potential tariff-fueled inflation would be “transitory,” uttering a pandemic-era phrase.
“It can be the case that it’s appropriate sometimes to look through inflation if it’s going to go away quickly, without action by us, if it’s transitory,” Powell said.
“That can be the case in the case of tariff inflation. I think that would depend on the tariff inflation moving through fairly quickly and, critically, as well on inflation expectations being well anchored.”
The futures market overwhelmingly expects the U.S. central bank to hold down the pause button for a third consecutive meeting in May.
Confidence and the Economy
Financial markets have reacted unfavorably to the wide range of surveys depicting a morose consumer and an anxious business.
“Consumers’ optimism about future income—which had held up quite strongly in the past few months—largely vanished, suggesting worries about the economy and labor market have started to spread into consumers’ assessments of their personal situations,” said Stephanie Guichard, a senior economist of global indicators at The Conference Board.
Tariffs were the root cause behind these fears, researchers said.
The CFOs generally described themselves as “pessimistic” about the state of the national economy.
Not everyone is planning for a gloomy scenario.
Eighty percent of small business owners say the economic outlook has become brighter since November.
Additionally, while 60 percent feared a downturn four months ago, more than two-thirds (68 percent) are betting on a thriving economic landscape.
“Small businesses aren’t just surviving—they’re ready to thrive,” Andrew Crapuchettes, CEO of RedBalloon.work, said in a statement.
“And, they’re ramping up hiring plans and searching for capital so they can put their businesses on the launchpad.”
Jeffrey Roach, chief economist for LPL Financial, says that viewing survey data would give the impression that the United States is on the brink of a recession.
“But the evidence is not all gloomy,” he said in a note emailed to The Epoch Times.
“Each recession begins with some exogenous shock to the economy, such as a terrorist attack, a banking failure, or a global pandemic. We don’t see such a shock on the horizon.”
