US Federal Reserve officials on Wednesday pointed to the large policy uncertainty around tariffs and other issues arising from the early days of US President Donald Trump’s administration as among the top challenges in figuring out where to take US monetary policy in the months ahead.
Chicago Federal Reserve President Austan Goolsbee warned that ignoring the potential inflationary impact of tariffs would be a mistake, whereas Richmond Federal Reserve President Thomas Barkin said it remains impossible at this early stage to know where cost increases from any tariffs might be absorbed or passed along to consumers.
The views of the two US central bankers were emblematic of the cautious approach Fed officials are angling to take in deciding whether to resume interest rate cuts later this year or to continue to keep them on hold.
Photo: Reuters
The Fed left its benchmark interest rate unchanged last week in the 4.25 to 4.50 percent range after cutting it at three straight meetings to close out last year.
The US economy is strong, the labor market is “plausibly” at full employment, and inflation has come down and is approaching the Fed’s 2 percent goal, Goolsbee said in remarks prepared for delivery to the Chicago Federal Reserve’s annual auto symposium in Detroit, Michigan.
“Yet we now face a series of new challenges to the supply chain — natural and manmade disasters from fires and hurricanes to collisions with bridges that take out major ports, canal cloggings and threats of dockworker walkouts; geopolitical disruptions; immigration; and, of course, the threat of large tariffs and the potential for an escalating trade war,” he said.
“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,” he added.
The Trump administration announced at the weekend that 25 percent tariffs on imports from Mexico and Canada were to start on Tuesday, but it delayed them until March 1 after the leaders of the two major US trade partners agreed to crack down on drug smuggling and help stem the flow of undocumented migrants into the US.
An additional 10 percent tariff on imports from China went into effect on Tuesday.
Barkin, speaking to reporters after a Conference Board event in New York, said that the “lean” in the latest set of policymaker projections is still toward further rate cuts this year, although uncertainty about the impact of tariffs, immigration and regulations would need to be better understood.
On tariffs specifically, Barkin said he sees three layers of complexity in arriving at their ultimate impact on inflation and demand.
First, is the uncertainty around the level of duties and exactly who they are levied upon, he said.
The next unknown is whether other nations retaliate with tariffs of their own and to what degree companies absorb or pass on the higher import costs.
Last is seeing “how this will all land on consumers,” he said.
Economists generally view tariffs as a one-time lift to prices that should not feed into inflation in any persistent way or suggest the economy is overheating, which means a response from the central bank is not required.
However, Goolsbee said this time “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,” compared with 2018 when Trump put import duties in place during his first administration.
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