Chicago Fed President Goolsbee on Tariffs, Inflation, and Interest Rates

Impact of Tariffs on Business and Policy

• 📈 President Goolsbee notes that businesses desire consistency and are in a "put your pencils down" moment due to frequent, major economic declarations.
• ⚠️ New, higher tariffs, such as a potential 50% on EU imports, are viewed as a macro factor that could significantly disrupt supply chains and lead to rising costs, similar to 2020-2022.
• ❓ While some see tariffs as a stepping stone to new deals, there is significant anxiety about their potential to disrupt supply chains and increase costs.

Fed Policy Amidst Uncertainty

• ⚖️ The bar for Fed action is higher due to the uncertainty and inconsistency stemming from trade policy shifts.
• 📉 In the short run, the Fed must wait for the dust to settle from new tariff announcements.
• ⚠️ Over the longer run, tariffs with a stagflationary impact (slowing output while raising prices) present a worst-case scenario for the central bank, potentially worsening both sides of the Fed's mandate.

Economic Vulnerability and Data Lags

• 📊 Imported goods, making up only 11% of US GDP, might not cause a large macro effect if they remain within this lane, similar to 2018.
• ⏳ A fear exists that negative effects might already be occurring but are not yet visible due to data lags (price data with a one-month lag, GDP data with a one-quarter lag).
• 🤞 There is hope that the economy will continue to perform well and that tariffs will not have a significant macro impact.

Interest Rates and Economic Slowdown

• 🏦 The long end of the yield curve is determined by market conditions and reflects the broader economy, impacting investment and consumer durable purchases.
• 📈 Higher long-term rates, regardless of Fed action, can contribute to an economic slowdown.
• ⚖️ The Fed must weigh the impact of rising long-term rates against potential factors like significant fiscal stimulus.