Fed’s Goolsbee Highlights Supply Chain Threats, Including Tariffs, as Inflation Risk

Chicago Federal Reserve President Austan Goolsbee warned Wednesday that threats to supply chains, such as tariffs, pose a challenge to the Federal Reserve’s efforts to curb inflation. He emphasized the difficulty in predicting the impact of such disruptions and how they could complicate the Fed’s goal of achieving a 2% inflation rate.

Goolsbee’s key remarks include:

Inflation’s Complexity: If inflation rises or stalls, the Fed needs to determine whether the cause is an overheated economy or factors like tariffs.
Current Economic Picture: Inflation is nearing the Fed’s 2% target, the US economy is strong, and the labor market is arguably at full employment.

The Importance of Diagnosis: Accurately identifying the source of any inflation resurgence is crucial for deciding if and when the Fed should intervene.
Supply Chain Lessons: The COVID-19 pandemic demonstrated the significant impact of supply chain disruptions on inflation.

Tariffs as a Threat: Goolsbee stressed that ignoring the potential impact of new supply chain threats, particularly tariffs, would be an error.

Uncertainty of Tariff Impact: There’s significant debate about how much of the cost of tariffs would be passed on to consumers, with the possibility that suppliers might absorb the costs.
Potential for Larger Impact: Goolsbee suggested that current proposed tariffs could be broader and higher than those implemented in 2018, potentially leading to a larger and more persistent impact.