Tariffs Could Derail the Fed's Inflation Progress: Chicago Fed President Goolsbee

The Federal Reserve's efforts to bring inflation back down to its 2% target could face a significant hurdle if President Trump follows through on his threat to impose tariffs on imports from Canada, Mexico, and China. Chicago Fed President Austan Goolsbee recently warned that such tariffs could generate the kind of underlying inflation the Fed fears, potentially derailing the central bank's progress in achieving its goal.

In remarks at an auto symposium in Detroit, Goolsbee cited a number of supply chain threats that include "large tariffs and the potential for an escalating trade war." He noted that if inflation rises or progress stalls 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.

The proposed tariffs could have a more significant and lasting impact on inflation than those implemented during Trump's first term. Economists generally see tariffs as having one-time impacts on prices, but the broader tariffs proposed in Trump's second term could lead to more persistent inflation if companies pass on higher costs to consumers or if supply chain disruptions persist.



The broader tariffs could also disrupt global supply chains, leading to second-round effects and price increases for multiple products far down the supply chain. For instance, a temporary slowdown in computer chip manufacturing during the pandemic had consequences far beyond what anyone anticipated, leading to price increases and shortages in other industries.



If the tariffs lead to a significant and persistent increase in inflation, the Fed may need to hold interest rates higher for longer or even consider tightening monetary policy to combat the inflationary pressures. However, if the tariffs are short-lived or their impact is limited, the Fed may choose to look through the temporary price boosts and focus on other factors driving the economy.

In conclusion, the proposed tariffs in Trump's second term could have a more significant and lasting impact on inflation than those implemented during his first term. The broader and more significant impacts of these tariffs could lead to more lasting inflationary pressures, disrupt supply chains, and force the Fed to reassess its policy stance. The Fed should learn from the previous experience and be prepared to respond to the potential impacts of the proposed tariffs on inflation and economic growth.