Contrary to investors' expectations, Neel Kashkari of the US Fed stated that tariffs have raised the threshold for an interest rate cut.

As Trump's tariffs continue to roil global financial markets, investors are looking to the US Fed to inject liquidity into the market. However, Fed officials recently stated that tariffs will raise the bar for interest rate cuts.

On Wednesday, Neel Kashkari of the Minneapolis Fed said that the US Fed needs to maintain the stability of long-term inflation expectations, and considering the impact of tariffs on inflation, the Fed will be more cautious in making decisions on interest rate cuts.

His remarks dampened market sentiment, leading to a short-term decline in the three major US stock indices. Investors had originally expected that the Fed would address these issues through interest rate cuts when financial markets and the economy deteriorate.

After Trump's tariff hikes and the countermeasures introduced by several countries, many economists have raised their expectations that the Fed will cut interest rates later this year to boost the economy.

Futures markets show that investors expect the Fed to cut interest rates four times this year, up from about three times a month ago. Economists have also significantly lowered their expectations for US economic growth and increased the likelihood of a US recession next year.

Kashkari said that Trump's tariffs are "much higher and broader than expected," and he expects these tariffs to reduce investment and economic growth, and at least push up inflation in the short term.

He wrote: "Due to the impact of Trump's tariffs, the barriers to changing interest rates in some way have increased. Given the importance of maintaining the stability of long-term inflation expectations and the possibility that tariffs may push short-term inflation higher, the bar for interest rate cuts is higher even in the face of economic weakness and potentially rising unemployment."

Kashkari pointed out that short-term inflation expectations have already started to rise, and the US has faced high inflation levels for many years, factors that may prevent the Fed from "turning a blind eye" to the price shocks caused by tariffs.

"Given the high inflation we have experienced in recent years and the risk of losing control of long-term inflation expectations, I believe our top priority must be to maintain the stability of long-term inflation expectations."

So far this year, policymakers have kept the benchmark interest rate unchanged and have indicated that they are in no rush to further cut interest rates after a 100 basis point cut at the end of 2024. They said the Fed is in a good position to assess the impact of new policies on the economy, including the comprehensive tariffs announced by the Trump administration last week.

Kashkari said that due to the increased cost of importing foreign goods for businesses caused by tariffs and the reduced willingness of businesses to invest due to increased economic uncertainty, the neutral interest rate may decline in the short term.

This means that even if the Fed does not cut interest rates, monetary policy is effectively tightening. Kashkari added: "This also reduces the urgent need to stabilize long-term inflation expectations through interest rate hikes."

Kashkari also provided some factors that could change his view. "A rapid resolution of trade policy uncertainty, or a more severe recession than expected, could prompt me to reassess the appropriate monetary policy outlook."

However, George Sarevelos, a strategist at Deutsche Bank, said on Wednesday: "If the recent turmoil in the US Treasury market continues, we believe the Fed will have no choice but to urgently purchase US Treasuries to stabilize the market."