(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 and is approaching the Fed’s 2% goal, Goolsbee said in remarks prepared for delivery to the regional Fed bank’s annual auto symposium in Detroit.
“Yet we now face a series of new challenges to the supply chain – natural and man-made 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,” Goolsbee 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,” Goolsbee said. “That distinction will be critical for deciding when or even if the Fed should act.”
The Trump administration announced last weekend that 25% tariffs on imports from Mexico and Canada would start on Feb. 4, but it delayed them until March 1 after the leaders of the two major U.S. trade partners agreed to crack down on drug smuggling and help stem the flow of undocumented migrants into the U.S.
An additional 10% tariff on imports from China went into effect on Tuesday.
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.
Goolsbee, however, 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 to 2018 when President Donald Trump put import duties in place during his first administration.
“If in 2018 companies shifted all the easiest things out of China, then what’s left might be the least substitutable goods,” he said. “In that case, the impact on inflation might be much larger this time.”
Goolsbee noted that in the auto industry, where parts used in the final assembly of a truck or car could cross borders multiple times as part of complex supply chains, tariffs could get stacked on top of tariffs.
And even if those tariffs don’t get passed directly along to car buyers, they can impact inflation in other ways, he suggested.
Suppliers say they believe manufacturers will balk at paying more for parts, so suppliers will end up eating the cost, and with margins tight already, they fear a wave of supplier bankruptcies, he said.
Goolsbee has until now been one of the Fed’s most vocal supporters of lowering interest rates to better align them with falling inflation.
(Reporting by Ann Saphir; Editing by Paul Simao)
