Fed President Goolsbee Warns of Tariff-Related Inflation

(Reuters) – Chicago Federal Reserve President Austan Goolsbee warned on Wednesday that ignoring the potential inflationary impact of tariffs would be a mistake, citing the COVID-19 pandemic experience, where supply chain disruptions drove up inflation.

The U.S. economy is strong, the labor market is “plausibly” at full employment, and inflation has come down, approaching the Fed’s 2% goal, Goolsbee stated in remarks prepared for the regional Fed bank’s annual auto symposium in Detroit.

Goolsbee noted the challenges to the supply chain include:
– Natural and man-made disasters
– Geopolitical disruptions
– Immigration issues
– Threats of large tariffs and an escalating trade war

“If we see inflation rising or progress stalling in 2025, the Fed will face a tough decision on whether it’s due to overheating or tariffs,” he mentioned. The distinction will be critical for deciding the Fed’s response.

Recently, the Trump administration announced 25% tariffs on imports from Mexico and Canada starting on February 4, later delaying them to March 1. An additional 10% tariff on imports from China took effect on Tuesday.

Economists traditionally view tariffs as a one-time inflationary bump that shouldn’t lead to persistent inflation or require central bank action. However, Goolsbee argued that current tariffs could have larger and longer-lasting effects, as they may apply to more countries or goods at higher rates.

Goolsbee highlighted that in the auto industry, tariffs could accumulate because parts often cross borders multiple times as part of complicated supply chains. Even if tariffs are not directly passed to consumers, they may still influence inflation. Suppliers worry that manufacturers may resist higher costs, leading to potential supplier bankruptcies due to tight margins.

Goolsbee has been a strong advocate for lowering interest rates to align them better with falling inflation.