Austan Goolsbee
Federal Reserve Bank of Chicago President Austan Goolsbee said persistent, outsize tariffs could renew supply-chain disruptions and drive up inflation.
Goolsbee, in prepared remarks he’s scheduled to deliver at a Chicago Fed auto conference in Detroit, warned against assuming tariffs won’t become inflationary. He laid out several lessons from the pandemic, among them that supply-side disruptions, including to supply chains, were the most important drivers of inflation and led to an overheating in the economy during and after the Covid-19 shock.
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“If we see inflation rising or progress stalling in 2025, the Fed will be in the difficult position of trying to figure out if the inflation is coming from overheating or if it’s coming from tariffs,” Goolsbee said. “That distinction will be critical for deciding when, or even if, the Fed should act.”
Goolsbee had been among the most dovish members—or least worried by inflation—on the Fed’s rate-setting committee for much of last year. Now that labor markets have stabilized, he has focused increasingly on the potential repercussions of tariffs.
This week, the Trump administration implemented a 10 percent tariff on all goods from China, and China has retaliated with levies on some U.S. products. Tariffs of 25 percent on goods from Mexico and Canada, announced earlier this week, have been postponed for a month. Several Fed officials have said they’re waiting to see the impact of the levies on the economy to determine whether they need to adjust policy.
Goolsbee said tariffs this time could apply to more countries or goods and could be longer-lasting. “We saw in Covid times that the more complex the supply chain, the longer it took to manage,” Goolsbee said. “The shocks might have started as transitory, but quickly they became traaaaansitory, at best,” he said in the text.
He also noted that tariffs from President Donald Trump’s first term may have driven some companies to shift production out of China when it was easy to do so. What remains there, he said, may be production of goods that are harder to substitute for, potentially amplifying any inflationary impact.
“Supply-side disruptions can have a material impact on aggregate inflation,” he said. “They aren’t always just minor disturbances that average out at the macro level. It is dangerous to just ignore them.”
Goolsbee said earlier this week that he supports lowering interest rates at a slower pace right now, given the risks of inflation heating up again. Policymakers kept interest rates on hold at their meeting January 28 and 29 after cutting them three consecutive times, by a total of one percentage point, in the closing months of 2024. Most have said it’s appropriate now to move at a slower pace, given uncertainties in the economy and inflation that remains above their 2 percent goal.
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