Fed's Goolsbee Warns: Tariffs Could Fuel Inflation

Chicago Fed President Austan Goolsbee has cautioned that proposed tariffs by the incoming Trump administration could have significant implications for inflation. In a recent speech, Goolsbee highlighted the potential risks of tariffs on consumer prices and the broader economy.



Goolsbee's concerns are rooted in the potential impact of tariffs on the prices of imported goods and services. According to the Budget Lab's analysis, a broad 10% tariff on goods imports, with a 60% tariff on Chinese imports, would raise consumer prices by 1.4 to 5.1% before substitution. This cost is equivalent to $1,900 to $7,600 per household in 2023 dollars. The level of consumer prices would rise by 1.4 to 5.1% before substitution, which represents 7 to 31 months of normal inflation under the Federal Reserve's target, and between a tenth and a third of the price level increase experienced over 2020-2023.

Moreover, retaliatory tariffs by other countries could exacerbate these effects. If targeted countries retaliate, tariff revenue falls by 12-26% depending on the scenario. This would raise the level of consumer prices by 1.2 to 5.1%, representing 7 to 31 months of normal inflation under the Federal Reserve's target, and between a tenth and a third of the price level increase experienced over 2020-2023. The loss in average disposable income from these price increases would be the equivalent of $1,900 to $7,600 per household in 2023 dollars.

Goolsbee's warnings come as the Trump administration has proposed a range of tariffs, including a blanket tariff of 10% to 20% on all imports, additional tariffs of 60% to 100% on goods imported from China, and a 25% to 100% tariff on goods from Mexico if the Mexican government doesn't tighten the U.S.-Mexico border. These proposals have raised concerns about their potential impact on inflation and economic growth.



In response to these potential inflationary pressures, the Federal Reserve may need to consider tightening monetary policy. This could involve raising interest rates, reducing bond purchases, or both. However, a too-aggressive response could have negative consequences for economic growth and employment. According to the Budget Lab's analysis, a broad tariff proposal could lower the level of US real GDP by 0.5% to 1.4%, shaving roughly $400 billion to $1 trillion off of revenue estimates. This would have a negative impact on economic growth and could lead to job losses as businesses struggle to maintain employment levels in the face of slower growth and higher costs.

In conclusion, Fed's Goolsbee has cautioned that proposed tariffs by the incoming Trump administration could have significant implications for inflation. The potential impact on consumer prices and the broader economy highlights the need for careful consideration of the proposed tariffs and their potential consequences. The Federal Reserve may need to respond to these inflationary pressures, but a too-aggressive response could have negative consequences for economic growth and employment. As such, a balanced approach to monetary policy will be crucial in navigating the potential challenges posed by tariffs.