MNI INTERVIEW: Fed Must Stay Hawkish Amid Tariff Shock-Kamin

Federal Reserve officials will likely avoid rate cuts for the foreseeable future because the shock from tariffs could boost inflation at a time when it’s already above target and expectations appear wobbly, former Fed board economist Steven Kamin told MNI. 

“Confronted with the choice that all central banks hate, simultaneous higher inflation and weaker growth, it would be logical given what we've gone through in the last few years and the strong possibility that people remembering that high inflation will be quicker to adjust their wage demands higher, that the Fed ought to be more hawkish than dovish,” said Kamin, who spent 32 years at the central bank including as director of the board’s Division of International Finance. 

He believes President Donald Trump’s newly-unveiled tariffs are likely to feed short-run inflation at a time when inflation expectations are already under pressure, with consumers and businesses still smarting from the post-Covid inflation surge. 

If the tariffs remain in place as currently outlined, PCE inflation could end the year at 3.5%, far above the Fed’s target and well past its upwardly-revised March estimate of 2.7%, and close out 2026 still at 3%, he said. (See MNI INTERVIEW: Tariff Benefits Loom Despite Some Fallout-Miran)

“Those look like pretty big numbers,” said Kamin, now a senior fellow at the American Enterprise Institute.

For now, it’s premature to consider any talk of rate hikes and the path of least resistance is for the Fed to leave the federal funds rate on hold at 4.25-4.5% for the foreseeable future. But if those inflation rates materialize, things might be different, he said.

“If we ended the year at 3.5% and we were not in a deep recession, then yes the Fed should be hiking rather than loosening." (See MNI POLICY: Fed Forced Into Hawkish Stance Despite Growth Risk)

RAISING REVENUES

While Kamin does not think tariffs will achieve the goals of spurring a new wave of U.S. manufacturing employment, he concedes they will help to provide some of the revenue needed to fund the president’s planned tax cuts. (See MNI INTERVIEW: US Factories Set For Contraction On Tariffs-ISM)

“It will definitely raise revenues, and it looks like it would raise a reasonable amount of what’s need to fund the renewal of the TCGA,” he said.

More broadly, Kamin fundamentally disagrees with the Trump administration’s central premise that bilateral trade deficits are necessarily bad or indicate that other countries are taking advantage of the United States.

“It could be a problem if your economy was suffering from insufficient demand, and that was occurring as a result of other countries’ unfair trade practices. That is not a problem in the United States. We've been running at or over capacity. We have an inflation problem, we don't have an unemployment rate problem,” said Kamin, also a former senior economist on the White House's Council of Economic Advisers.

“If you look at the course of the last five decades, the trade deficit has gotten much wider than it was in the 60s and 70s but the unemployment rate is actually lower than it was then.”

CRISIS MANAGEMENT

Kamin said market volatility surrounding Trump’s tariff announcement is not yet of the kind of magnitude that would cause financial stability concerns. A broader seizure in credit markets is more likely to spur Fed action in the form of rate cuts than any first inklings of economic weakness due to tariffs, he added. 

“Even though the Fed is not supposed to respond to financial market volatility per se, an uncontrolled fall in the stock market, combined with a similar decline in the dollar, combined with a big rise in credit spreads and a reduction in credit availability – that is the surest, quickest route toward maybe the Fed cutting rather than raising even before that showed up in the real side,” he said.