Federal Reserve Governor Warns Tariffs May Boost Inflation, Slow Growth

Federal Reserve Governor Adriana Kugler has expressed concerns that the latest tariff policies implemented by the Trump administration could exacerbate inflation and hinder economic growth in the United States. Despite recent announcements of reduced tariffs on Chinese goods, Kugler warned that the overall impact on the economy could still be significant.

In a speech prepared for an event in Dublin, Kugler stated, "Trade policy is evolving and may continue to change, even as of this morning. Nevertheless, even if tariffs remain at the levels recently announced, they still appear likely to have major economic impacts." She emphasized that the average tariff rate in the U.S. remains higher than it has been over the past few decades, which could lead to increased inflation and slower economic growth.

Kugler also noted that if tariffs remain elevated compared to the beginning of the year, the economic impacts could be substantial, including rising inflation and a slowdown in growth. Chicago Federal Reserve President Austan Goolsbee echoed these sentiments, stating that the current tariff environment poses higher risks for price increases and economic slowdown. He highlighted that the temporary nature of the U.S.-China tariff agreement and the overall high tariff levels continue to weigh on the economy.

Federal Reserve policymakers recently decided to keep the benchmark interest rate unchanged for the third consecutive meeting. Kugler supported this decision, citing the upward risks to inflation and the restrictive nature of the Fed's policy stance on the U.S. economy. She mentioned that she would closely monitor developments as inflation and employment may move in opposite directions in the future, influencing her considerations for future policy paths.

During a Q&A session following her speech, Kugler described the temporary U.S.-China tariff agreement as a "step in the right direction," but noted that tariffs between the two countries remain "quite high." She still expects prices to rise and economic growth to slow, although not to the same extent as previously anticipated. Kugler stated that her overall outlook has shifted somewhat, but the direction of her policy recommendations remains unchanged.

Kugler predicted that tariffs would act as a negative supply shock, leading to higher prices and reduced economic growth and consumer demand. She also warned of significant impacts on productivity, as businesses may reduce investments and adopt less efficient measures to cope with the situation. The overall decrease in economic demand could make it harder for job seekers to find employment.

Kugler described the U.S. employment situation as "basically stable," but noted that progress in reducing inflation has slowed since last summer. She pointed out that various indicators, including the Fed's Beige Book, show that tariffs have already affected the behavior, sentiment, and expectations of consumers and businesses. Despite these challenges, Kugler remains cautious but optimistic about the future economic outlook.