Topline
President Donald Trump’s 10% tariffs on all trading partners would cause inflation to worsen in the near term, said one of the U.S.’ top monetary policy decision makers Thursday, as the central bank grapples with heightened economic uncertainty and direct calls from Trump to lower rates.
Key Facts
Federal Reserve Bank of Chicago President Austan Goolsbee told reporters at the Economic Club of New York on Thursday afternoon a 10% global tariff would cause inflation to “materially increase” and have a “somewhat serious” negative impact on economic output, referring to an undesirable “stagflation” scenario in which the economy is marred by higher prices and weak growth.
There’s no “generic playbook” for the Fed to follow in this scenario, said Goolsbee, who is one of the 12 voting members of the Federal Open Market Committee that sets the target federal funds rate, explaining higher inflation expectations and potential labor market weakness work against each other in terms of deciding whether to move interest rates.
“The Fed’s timetable is not the market, stock market’s timetable,” added Goolsbee, nodding to the extensive turbulence across equities as investors digest Trump’s tariffs.
There’s a “fundamental fear” among Chicago area business leaders that inflation could continue on the same trajectory as 2021 and 2022, during which inflation peaked at a four-decade high, said Goolsbee.
Yet, Goolsbee said he believes the central bank will still lower rates in the next “12, 18 months.”
But “the bar” for the Fed to make any changes to interest rates is “a little higher,” said Goolsbee about the significant uncertainty posed by the president’s tariffs.
Crucial Quote
“It’s not a pause of anything,” Goolsbee said about Trump’s announcement Wednesday delaying many of his harshest tariffs by at least 90 days. The still-on tariffs are “pretty sizable” and “we don’t yet know how long it’s going to last or what the extended impacts are,” Goolsbee explained.
Big Number
4.25% to 4.5%. That’s the target federal funds rate range, where it’s stood since December. Though that’s down 75 basis points from the 2024 apex, it’s higher than it ever was from 2008 to 2022 as the central bank grappled with four years of higher than ideal inflation.
Surprising Fact
A day after the S&P 500 booked its biggest single-day gain in 17 years as Trump paused some of his levies, stocks lost much of their gains Thursday, as the S&P fell 5% by mid afternoon. The index is down 9% since Trump escalated his trade rhetoric last Wednesday.
Key Background
Trump said last Thursday it’s a “PERFECT time” for the Fed to cut rates, though Fed Chairman Jerome Powell indicated Friday the central bank was in no rush to do so. Investors believe it’s more likely than not the Federal Open Market Committee will hold rates steady at its meeting next month, as “Fed swap” derivatives trading price in a 27% chance of a cut and a 73% probability of another hold, according to CME Group data. But markets price in a full percentage point of cuts as the most likely scenario by year’s end, as fears of a recession and a related labor market slowdown pervade Wall Street. The Fed operates on a dual-mandate system to ensure price stability and maximize employment, making the prospect of navigating a scenario in which tariffs simultaneously raise prices and unemployment difficult.
Further Reading
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