Zinger Key Points
- Chicago Fed's Austan Goolsbee warns new tariffs and supply chain risks could delay or halt the Federal Reserve’s rate cuts.
- Goolsbee highlights inflation risks if tariffs hit less substitutable goods, making price pressures "larger and longer lasting" than in 2018
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One of the Federal Reserve's most dovish policymakers is taking a sharp shift toward a more hawkish posture, warning that new trade tariffs and supply chain disruptions could force the Fed into a difficult position—either slowing down planned rate cuts or reconsidering whether to cut at all.
Speaking at the Automotive Insights Symposium in Detroit, Chicago Fed President Austan Goolsbee indicated that "a series of new potential threats" could disrupt the economy, drawing comparisons to the pandemic-era supply chain crisis.
How Tariffs Could Disrupt Fed's Rate Plans
With inflation cooling but still above the Fed's 2% target, investors anticipate rate cuts this year. Futures markets currently price in a 66% probability of a Fed rate cut by June, according to CME Group's FedWatch Tool.
Yet, Goolsbee's comments suggest that rising tariffs could complicate the central bank's decision-making process.
Goolsbee mentioned multiple risks, including natural disasters, dockworker strikes, geopolitical commodity shocks, and—most notably—higher tariffs.
"Compared to 2018, tariffs may apply to more countries or more goods or at higher rates," Goolsbee said. "In that case, the impact could turn out to be larger and longer lasting."
Inflation And the Supply Chain Factor
If companies have diversified their production lines in the last five years, they may have some flexibility to shift manufacturing away from countries facing higher tariffs.
But Goolsbee warned that the easiest adjustments may have already been made.
"If in 2018 companies shifted all the easiest things out of China, then what's left might be the least substitutable goods," he said. "In that case, the impact on inflation might be much larger this time."
One of the Fed's key challenges is determining whether inflation pressures stem from an overheating economy or external supply shocks like tariffs and trade disruptions.
Goolsbee made it clear that this distinction will be crucial in shaping the Fed's next moves.
"If we see inflation rising or we see the progress on inflation stalling this year, the Fed is going to be in the difficult position of trying to figure out if the inflation is coming from overheating or if it’s coming from tariffs or some supply disruption," he said. "That distinction is going to be critical for deciding when the Fed should next act—or even if the Fed should next act."
This echoes a broader debate among policymakers. While Fed Chair Jerome Powell hasn’t ruled out the potential for rate cuts in 2025, concerns over persistent inflation could delay or even derail Fed’s action.
The Fed's preferred inflation gauge, the core personal consumption expenditures index, remains at 2.8%—down from its peak but still above target.
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