Fed official warns of larger rate cut if US tariffs remain in place

• Fed official warns inflation could temporarily rise to 5%.
• Says prolonged tariffs may lead to sharp rise in unemployment.
• Says negative effects on jobs and output may last much longer.

WASHINGTON: A senior US central bank official has warned that interest rates may need to be cut more sharply than expected if President Donald Trump’s steep tariffs on imports stay in place for an extended period, as they risk slowing the economy and raising unemployment.

Trump unveiled sweeping tariffs in early April against most US trading partners in a bid to address practices that Washington deems unfair, including a 10 percent global levy and higher country-specific rates, especially on China.

The higher rates on countries other than China have been paused for 90 days but would have pushed the effective average US tariff rate to 25 percent.

Even with the pause, the overall average still remains around 25 percent due to the high tariff rates imposed on Chinese goods.

If this level is maintained for some time, "economic growth is likely to slow to a crawl and significantly raise the unemployment rate," Federal Reserve governor Christopher Waller told an event in Missouri on Monday, according to a copy of his prepared remarks.

Waller expects elevated inflation "would be temporary", but noted that it could rise as high as five percent in the near term, and said the effects "on output and employment could be longer-lasting".

"If the slowdown is significant and even threatens a recession, then I would expect to favour cutting the FOMC’s policy rate sooner, and to a greater extent than I had previously thought," he said, referring to the Fed’s rate-setting committee.

He added that with a rapidly slowing economy in this scenario, the risk of recession would likely outweigh the risk of escalating inflation.

The US central bank has held interest rates steady at 4.25 to 4.5 percent since the start of this year.

On Friday, the Trump administration temporarily excluded products such as smartphones, laptops and chip-making equipment from the "reciprocal tariffs", providing a reprieve from the 10 percent global rate and the 125 percent levy on goods from China.

But many others remain, including an earlier 20 percent tariff on imports from China over its alleged role in the fentanyl supply chain, and levies on steel and aluminium imports.