MNI: Fed Goolsbee: Apr 2 Tariffs Materially Increase Inflation

President Trump's sweeping April 2 tariffs on dozens of trading partners, most of which have since been put on hold for 90 days, would materially increase inflation and drag down growth, Chicago Fed President Austan Goolsbee said Thursday.  

"The pause with 10% on the rest of the world with no exemptions will materially increase inflation in the near term and have a somewhat serious impact on output," he told reporters after speaking to the Economic Club of New York. 

Business executives have told him they're putting off investment but not yet talking more about layoffs as there's still a lot of uncertainty, he said. "There are several question marks: are there going to be exemptions, how long are we talking about? What's going to happen in 90 days?" 

The Chicago Fed had contemplated a baseline scenario of modestly higher tariff rates on the whole world and 10% on China and a darker case of 10% on the entire world and 25%-30% on China. The April 2 set of tariff rates were outside of anything expected, Goolsbee said. It's a "big scenario, it's not negligible," he said.  

The Chicago Fed chief sketched out what might cause him to consider rate hikes or cuts but said he didn't want to say anything "to tie my hands."  

"Let's say we have the shock, we would be contemplating central bank rate increases if expectations long run start getting unanchored or you're not seeing a slowdown but you are seeing deterioration on the price side of the mandate. Likewise, rate cuts are on the table with a resolution of uncertainty, plus the economy is deteriorating and you're not seeing an increase in either expectations or inflation," he said.

Hard data still looks solid, and March CPI was quite modest, Goolsbee noted. "The more months like that you get the more comfort you have." But noisy survey-based measures of inflation expectations do tend to be correlated with longer run measures. "It's an area of concern," he said.   

"In a situation where you face a stagflationary supply shock, which in my view tariffs are, you have a lot of uncertainty and mostly when there's uncertainty that's a time for sniffing and trying to gather more information." With uncertainty high, "the bar for action in the near term I think is a little higher," he said.