Ignoring Tariff Inflation Risks a Policy Mistake, Says Chicago Fed President

Chicago Federal Reserve President Austan Goolsbee warns that neglecting the potential inflationary effects of tariffs could be a grave error. Citing the inflationary surge triggered by supply chain disruptions during the COVID-19 pandemic, Goolsbee emphasizes the importance of remaining vigilant in addressing potential inflationary pressures.

In a speech prepared for the annual auto symposium in Detroit, Goolsbee highlighted the robust U.S. economy, full employment, and the Fed's progress towards its 2% inflation target. However, he cautioned that the economy faces a multitude of supply chain challenges, including natural disasters, trade conflicts, immigration, and the threat of escalating tariffs.

Goolsbee warns that if inflation rises or progress stalls in the coming years, the Fed will find itself in a quandary, trying to determine whether inflation stems from economic overheating or tariff-related disturbances. This distinction, he stresses, will be crucial in guiding the Fed's policy response.

The Trump administration's imposition of 25% tariffs on imports from Mexico and Canada, followed by an additional 10% tariff on Chinese imports, has raised concerns among economists. While tariffs are typically viewed as a one-time price increase without long-lasting inflationary effects, Goolsbee believes the current situation may be different.

"Tariffs may apply to more countries, more goods, or at higher rates, in which case the impact could be larger and longer lasting," he warns, noting that companies may have already shifted production out of China, leaving less substitutable goods subject to higher tariffs.

In the auto industry, where complex supply chains often involve multiple border crossings, tariffs could have a compounding effect. Moreover, even if tariffs are not passed directly to consumers, they could impact inflation indirectly by squeezing supplier margins and potentially leading to bankruptcies.

Goolsbee, who has been an advocate for lowering interest rates to align with falling inflation, emphasizes the need for careful consideration of potential inflationary risks posed by tariffs. Ignoring these risks, he cautions, would be a policy mistake with potentially adverse consequences for the U.S. economy.