Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, expressed concerns regarding the impact of recent tariffs on inflation expectations. He indicated that the possibility of adjusting monetary policy is now broader, given the tariffs’ effects.
Kashkari noted that the likelihood of rate cuts has risen, particularly if economic indicators show weakness, while the falling neutral rate diminishes the need for immediate hikes. He warned that the tariffs could unanchor inflation expectations, making it risky to disregard their inflationary effects.
Economic Impacts Of Tariffs
The tariffs, which were more extensive than anticipated, are expected to elevate near-term inflation, decrease purchasing power, reduce investment, and shrink GDP. Prioritising the stability of long-run inflation expectations is deemed essential before addressing other economic goals.
Kashkari’s recent remarks highlight a growing discomfort within the Federal Reserve regarding how trade policy is complicating the inflation picture. Rather than viewing tariffs solely through the lens of diplomacy or sectoral competitiveness, the focus has shifted toward their influence on expected price growth. These expectations, if shaken, can change the behaviour of businesses and consumers in a way that reinforces higher inflation levels—a dynamic that demands careful attention.
For those watching interest rate markets, the implications are clear. The door to rate reductions is opening wider, not because of any single data point but due to an accumulation of risks. The conversation has shifted from when to raise interest rates, to whether delaying cuts could do more harm than good. Kashkari made it apparent that the cost of inaction might be rising, particularly if forward-looking metrics, such as core inflation trends and job market resilience, begin to fray.
The notion that the neutral rate—essentially the rate at which monetary policy is neither stimulating nor restricting growth—has fallen, suggests that previous thresholds for adjusting rates may no longer apply. A lower neutral rate reduces the room for policy tightening even if inflation is sticky. We find ourselves needing to reassess what a ‘normal’ interest rate environment now looks like, especially when fiscal measures such as tariffs push prices higher, independent of demand dynamics.
Inflation Assumptions And Policy Action
More pressing, however, is the risk that longer-term inflation assumptions, which have remained predictably anchored for years, could drift. Should that occur, the Fed’s response would need to be definitive. Delayed reaction could seed widespread uncertainty on long-term returns, pricing models, and investment allocations. Kashkari’s comments suggest increasing discomfort with that scenario, and it serves as a warning that inflation management remains the top priority—regardless of how difficult it may make other objectives.
For pricing volatility and speculative positioning, there’s a recalibration brewing. Changes in expected inflation spill over directly into how we model forward rates and implied volatility across maturity curves. The impact will not be isolated to front-end yields; rather, it may be felt more acutely across the mid and long-term horizons, particularly where inflation risk premia get priced in.
In our models, there’s little room for assuming a quick return to pre-tariff conditions. The breadth of the levies appears larger than forecasters priced in, which will compress margins and curb capital spending in key sectors. Meaningfully lower investment can dent future productivity, which in turn undermines potential output. These downstream effects collectively suggest that the usual disinflationary forces associated with market slowdowns could be blunted.
That said, we must avoid assuming policy action will be linear or swift. While the tone has shifted to openness around lowering rates, a clear signal—one supported by softening labour data or declining consumption—has yet to emerge. Until then, policy adjustments risk appearing inconsistent or reactive, particularly if inflation expectations remain volatile.
Against this backdrop, liquidity risk and short-dated vol may widen. The traditional backstop of central bank predictability is thinning. As participants, we need to account for a wider distribution of rate outcomes over the next 3–6 months, grounding our strategies in more granular readings of CPI components and forward-looking purchasing trends. The path ahead is more uncertain, not less, and will demand more frequent recalibration of positioning.
