MNI: Fed's Goolsbee Warns Don't Underestimate Tariffs Effect
MNI (DETROIT) - President Donald Trump's second-term tariffs could have a bigger more long-lasting impact on inflation than those of his first term, Federal Reserve Bank of Chicago President Austan Goolsbee warned Wednesday, adding the Fed's policy response will depend on the detailed drivers of any inflationary pressures that emerge this year.
"Compared to 2018, tariffs may apply to more countries or more goods or at higher rates, in which case the impact could turn out to be larger and longer lasting. We saw in Covid times that the more complex the supply chain, the longer it took to manage. The shocks might have started as transitory but quickly they became transitory, at best," Goolsbee said in remarks prepared for an automotive conference in Detroit, Michigan.
Pandemic-era supply chain disruptions caused the U.S. economy to overheat even when unemployment was high, and research suggests inflation was much greater for goods where supply shocks seemed more prevalent than on the aggregate level, he noted.
"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. That distinction will be critical for deciding when or even if the Fed should act."
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Fed officials held their benchmark overnight rate steady last week and said they need to see more improvement on inflation or additional weakness in the labor market before cutting interest rates further. Goolsbee has said he still sees rates dropping to neutral in the next 12 to 18 months. He did not make detailed comments on rates in Wednesday's speech. (MNI INTERVIEW: Fed Rates Likely On Hold Through 2025-Croushore)
A key lesson from the pandemic is supply-side disruptions can have a material impact on aggregate inflation, he said.
What matters most for how tariffs impact inflation is the degree of substitutability for the affected goods, Goolsbee said. If companies diversified supply chains since 2018, it's possible they can avoid tariffs without much impact on prices.
But, "if in 2018 companies shifted all the easiest things out of China, then what’s left might be the least substitutable goods. In that case, the impact on inflation might be much larger this time," he said.
Tariffs on intermediate goods, which comprise about half of U.S. imports, are also likely to have a broader impact on prices than just the directly affected products, he said. But industry contacts hold differing opinions on how tariffs might pass through to consumer inflation.
"Some participants believe it would rapidly go into prices and will mean higher consumer inflation. Many suppliers, though, think manufacturers would not allow prices to rise much and the suppliers will have to eat the cost. Suppliers don’t have much margin for error these days and many fear a wave of bankruptcies," he said.