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There is now a “healthy debate” within the Federal Reserve about whether any inflation triggered by President Trump’s tariffs will prove to be transitory, according to Minneapolis Fed president Neel Kashkari.Some policymakers are arguing for “looking through” the impact of the duties as temporary, but Kashkari identified himself as belonging in the other camp of officials who believe trade talks could take “months or years” to resolve and said, “There could be tit-for-tat tariff increases as trading partners respond to one other.”Thus Kashkari wants to keep rates steady “until there is more clarity on the path for tariffs and their impact on prices,” he added while speaking in Tokyo Tuesday. “I find these arguments more compelling given the paramount importance I place on defending long-run inflation expectations.”Neel Kashkari, president and CEO, Federal Reserve Bank of Minneapolis. REUTERS/David Swanson (REUTERS / Reuters)One of the big questions facing central bank policymakers at the moment is what effect Trump’s trade policies will have on the direction of inflation and the US economy.Read more: What Trump’s tariffs mean for the economy and your walletThe White House has argued that the Fed should view any price increases as a one-time event, with Trump himself repeatedly calling for the Fed to lower rates, but many Fed officials have made it clear they are not sure which way things will go.The uncertainty highlights the dilemma for the central bank as it tries to weigh both sides of its mandate — stable prices and maximum employment — at a time when the true effects of White House trade policies on the economy are still unknown.Fed governor Chris Waller is one central bank policymaker who has said a surge in tariff-related inflation could in fact be “temporary,” which would allow Waller to “look through it and determine policy based on the underlying trend.”If trade negotiations are successful and the effective tariff rate is 10% then Waller sees inflation around 3% and says preemptive rate cuts from the Fed last year give the central bank time to “wait and see” how the economy evolves.Federal Reserve Governor Christopher Waller. REUTERS/Brendan McDermid (REUTERS / Reuters)This week will bring a fresh reading on the Fed’s favored inflation gauge: the so-called “core” Personal Consumption Expenditures index for the month of April.While the reading due to be released Friday will take into account many of the administration’s tariff effects so far, year-over-year inflation is expected to have ticked down to 2.5% in April from 2.6% in March.At the same time, economists will get a second reading on first quarter GDP, which initially sent shockwaves showing a 0.3% contraction. That small contraction is expected to hold.Earlier this month, Fed policymakers voted unanimously to maintain the Fed’s benchmark interest rate in the range of 4.25% to 4.5%, a mark reached at the end of 2024 after cutting rates by a full percentage point last fall.Read more: How the Fed rate decision affects your bank accounts, loans, credit cards, and investmentsFed officials noted in a statement that uncertainty about the economic outlook has “increased further,” but said the economy has continued to expand at a “solid pace” despite swings in net exports that affected data during the first months of 2025.Many Fed officials have said in the weeks since that decision that they want to wait for greater clarity before considering any interest rate adjustments, as they expect President Trump’s tariffs to generate higher inflation and slower growth.Those twin developments, Fed Chair Jerome Powell has said, could create a dilemma where both sides of the central bank’s dual mandate for keeping prices stable while maximizing employment could be in conflict — eventually forcing the Fed to choose between the two.U.S. Federal Reserve Chair Jerome Powell. REUTERS/Kevin Lamarque/File Photo (REUTERS / Reuters)Powell has said there is a strong likelihood that the economy will move away from both of the Fed’s goals for the balance of the year, or at least not make much progress.Kashkari on Tuesday invoked comments from his colleague Beth Hammack, president of the Cleveland Fed, who recently said, “I would rather be slow and move in the right direction than move quickly in the wrong direction.”He also stressed that some tariffs apply to parts used to make final products, and it will take time for the full effects of those price increases to pass through to final prices.“In the US, inflation has also been running well in excess of our 2% target for four years,” Kashkari said.“How many years of elevated inflation can occur before long-run inflation expectations lose their anchor? These arguments support a stance of maintaining the policy rate, which is likely only modestly restrictive now.”Click here for in-depth analysis of the latest stock market news and events moving stock pricesRead the latest financial and business news from Yahoo Finance
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