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A top Federal Reserve official warned it would be “a mistake” to underestimate the potential for Donald Trump’s planned tariffs to push up prices.
Austan Goolsbee, president of the Chicago Fed, on Wednesday said central banks’ tendency to follow “pure economic theory” and ignore supply shocks such as tariffs was “dangerous”.
The US faced a “series” of challenges to the supply chain, Goolsbee said, including strikes and natural disasters. The economy also faced “the threat of large tariffs and the potential for an escalating trade war”, he added.
“These threats are not of the scale of what occurred during the pandemic but passing over their potential consequences would be a mistake,” he said.
The comments from one of the Fed’s top officials, and a member of the central bank’s rate-setting panel, come just days after the president threatened to impose 25 per cent tariffs on two of the US’s biggest trade partners, Mexico and Canada.
Trump on Monday afternoon said he was postponing the levies on Canada and Mexico until March 1 but hit China with tariffs of 10 per cent, prompting Beijing to announce tariffs of its own on some US imports.
Goolsbee’s remarks contrast with Fed chair Jay Powell, who last week said rate-setters would need to “wait and see” the impact of tariffs before deciding how they would affect their interest rate decisions.
Following the decision to hold interest rates in the 4.25 per cent to 4.5 per cent range, Powell said: “We don’t know what’s going to be tariff[ed], we don’t know for how long or how much, what countries, we don’t know about retaliation, we don’t know how it’s going to transmit through the economy to consumers. That really does remain to be seen.”
Still, most private economists expect tariffs to be inflationary, and expectations for Fed rate cuts this year have fallen considerably since autumn as price growth has remained above the central bank’s target.
Goolsbee said the “overwhelming” lesson from the pandemic was that central bankers should not ignore supply-side shocks, saying these had been “the most important drivers of inflation over the past five years”.
“We saw in Covid times that the more complex the supply chain, the longer it took to manage,” he said in prepared remarks.
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