By Nicole Goodkind

Kansas City Fed President Jeffrey Schmid delivered a sharp warning on the risks posed by escalating trade tensions, signaling a shift in his economic outlook following former President Donald Trump's tariff plans and the market volatility they have created.

In a speech Thursday, Schmid said that while the U.S. economy has entered this turbulent period from a position of relative strength, with economic growth near 3% and unemployment holding around 4.2%, the recent turn in markets and economic uncertainty has made the Federal Reserve's task more complicated.

"The recent tariff announcements have elevated economic uncertainty and have coincided with a decline in consumer sentiment and increases in near-term inflation expectations," Schmid said at a roundtable in Kansas City, Missouri. "There is a growing possibility that in setting policy, the Fed will have to balance inflation risks against growth and employment concerns."

That balancing act has become trickier over the past week. Schmid made clear that his bias remains firmly on the side of containing inflation, even if it means tighter policy when growth risks are mounting.

"I am not willing to take any chances when it comes to maintaining the Fed's credibility on inflation," Schmid said. He reminded listeners of the inflationary spiral of the 1970s and warned that a further increase in prices could entrench inflation expectations.

The comments come as markets deal with Trump's trade policy. Though the administration paused the implementation of additional, country-specific tariffs on most trading partners for 90 days, the effective U.S. tariff rate still stands at a historically high level of 23%. Analysts at Morgan Stanley say it leaves the economy "living on the edge."

While the delay reduces the immediate risk to the economy, "it prolongs uncertainty," Morgan Stanley Research analysts wrote in a note Thursday. They projected that the core personal consumption expenditures inflation rate, the Fed's preferred inflation gauge, will surge to 4% by year-end, cautioning that "risks remain skewed asymmetrically to the downside."

The latest data available, for February, showed an annual rate of 2.8%, which was higher than expected.

Inflation has fallen significantly from multidecade highs, with March CPI data showing further easing. But Schmid's speech suggests that progress could be threatened by a tariff-induced supply shock.

"While in theory, tariffs may have only temporary effects on inflation...I would be hesitant to take too much solace from theory in this environment," Schmid said.

The next Federal Open Market Committee meeting of Fed policymakers is scheduled for May 6-7.

Write to Nicole Goodkind at nicole.goodkind@barrons.com

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April 10, 2025 11:23 ET (15:23 GMT)

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