MNI: Fed's Cook- Tariffs' Drag On Productivity Means Inflation

Tariffs and the uncertainty around how trade policy will evolve will hold down productivity growth in the near term and argues for holding interest rates higher for longer, Federal Reserve Governor Lisa Cook said Friday, adding wider adoption of AI could also counter some of that productivity drag. 

"A reduction in potential GDP means less slack in the economy, which, in turn, means greater inflationary pressure," she said in remarks prepared for the Hoover Institute. "Taming higher inflation requires a higher policy rate. I believe that keeping inflation expectations credibly anchored is essential. Therefore, all else equal, lower productivity could cause me to support keeping rates at a higher level for longer." 

Higher import costs and uncertainty around trade policy are both likely to reduce business investment, which can lead to slower
innovation and decreased overall efficiency in production processes, Cook said. Supply chain disruptions make production slower and less efficient, and protectionist trade policies may also inadvertently lead to a less competitive environment, she said. (See: MNI INTERVIEW: Tariffs' Inflationary Impact Will Last - Koenig)

The expansion of AI meanwhile is likely to have a significant positive effect on productivity growth, she said. 

"Those two developments may prove to run counter to each other, but it is too soon to predict precisely."