Federal Reserve Bank of Chicago President Austan Goolsbee stated that the inflationary impact of tariffs could be transitory if they were limited in scope.
On Friday, March 21, Mr. Goolsbee, while talking to media representatives, said that imports account for only 11% of the gross domestic product (GDP) of the United States. According to him, against the background of the mentioned circumstance, one-time tariffs that will not entail retaliatory measures and that do not spread out to what they were originally applied for are likely to be transitory for inflation and monetary policy.
It is worth mentioning that the President of the United States, Donald Trump, has already imposed 20% levies on goods imported from China. He also decided on tariffs on steel and aluminum imports. Moreover, Donald Trump is currently expected to announce on April 2 the so-called reciprocal levies. It is worth noting that the implementation of measures to tighten Washington’s monetary policy is already having a result in the form of retaliatory actions from other world capitals. Canada, the European Union, and China have taken appropriate decisions. It is worth noting that in some cases, tariffs have been imposed, while in others, intentions for these actions have only been announced so far.
Austan Goolsbee said that Washington’s tightening trade policy and retaliatory measures from other world capitals could force the Federal Reserve to respond. It is worth noting that he was actually the first representative of the Fed to make a public statement after the Chairman of the financial institution, Jerome Powell, spoke this week after a meeting of the central bank of the United States on monetary policy and used the word transitory to describe the basic case for any price increase related to the tariff policy of the Donald Trump administration. Mr. Powell noted that the US financial regulator really can’t know. He also said that officials of the central bank of the United States have yet to see how tariffs will eventually play out.
In the context of analyzing the practice of the US financial regulator’s response to the situation in the country and to the more global circumstances of the historical moment, the media reminded that the Fed did not demonstrate quick action when a surge in inflation was recorded in the economic reality of the United States against the background of the coronavirus pandemic. It is still unknown whether this experience will be repeated in the context of the gradually beginning world trade war.
Representatives of the central bank of the United States lowered their forecast of economic growth for the current year. At the same time, Fed officials increased their projections for the further dynamic of inflation and unemployment.
Jerome Powell stated that tariffs can push out inflation. At the same time, the head of the central bank of the United States still holds the view that price growth in the country will slow down over the next two years.
Austan Goolsbee stated that the hard data continues to show that the US economic system is strong. It also expects that in the next 12-18 months, the central bank of the United States will make another decision on lowering the cost of borrowing. At the same time, it should be separately noted that the implementation of the corresponding scenario will be possible if inflation in the US continues to cool.
Some other representatives of the Fed also made public statements about the current state of affairs and the subsequent prospects for the transformation of the situation. Federal Reserve Bank of New York President John Williams stated that there is currently a high level of uncertainty about what impact rapid changes in immigration, trade, and fiscal policy will have on the condition of the United States economic system. In this context, he noted that the current configuration of the monetary policy of the US financial regulator is appropriate and allows the Fed to respond effectively to varied conditions. John Williams made the relevant statements on Friday in remarks prepared for the Macroeconometric Caribbean Conference in Nassau, Bahamas.
The Federal Reserve Bank of New York President noted that there are many possible scenarios for the further dynamic of the situation in the United States economic system in the context of the current uncertainty. According to him, the forecasts of Fed officials published this week on a slowdown in GDP growth and upward adjustments projections on inflation and unemployment seemed reasonable.
John Williams stated that the current modestly restrictive configuration of the monetary policy of the central bank of the United States is entirely appropriate, given the solid situation in the labor market and the fact that inflation is still slightly higher than the US financial regulator’s target of 2%. Also, according to him, the mentioned approach allows the Fed well to adjust to changing circumstances that affect the achievement of dual mandate goals.
The statements of John Williams echoed the statements of Jerome Powell that the US labor market and the growth demonstrated by the United States economic system continue to be solid. At the same time, long-term inflation expectations remained anchored. John Williams expects the United States economy to show moderate growth in the current year. The corresponding expectation is partly related to the slowdown in labor force expansion against the background of reduced immigration. John Williams also predicts higher inflation and unemployment in the United States in 2025. When asked about long-term inflation expectations, which are a closely watched measure, he noted that the University of Michigan’s gauge is just one piece of information and can be volatile at times. Other measures, according to him, have remained stable.
It is worth mentioning that this week the central bank of the United States decided to keep interest rates at the same level for the second time in a row. In the second half of last year, the benchmark interest rate was cut by a full percentage point. At the level of official rhetoric, the Fed has repeatedly stated that there is no need for haste in making decisions regarding monetary policy adjustments. Currently, the central bank of the United States adheres to a kind of wait-and-see attitude in the relevant issue. This means that the US financial regulator has chosen in favor of waiting for greater clarity on what consequences the decisions and actions of the Donald Trump administration in the areas of trade, immigration, and regulation will have on the situation in the country’s economic system.
John Williams stated that the direct ramifications of tariffs can be short-lived. At the same time, he noted that there are situations where the effects could be more persistent. According to him, it is necessary to assess what’s happening in terms of policies, what’s going on in the economy differently, and really think through kind of where this balance of risk to achieving the Fed’s goals is.
It’s worth mentioning that John Williams also said this month that he expects Washington’s trade policy to tighten by increasing tariffs on imported goods will trigger an acceleration in inflation in the United States. At the same time, in the relevant context, Mr. Williams separately noted that so far there is uncertainty about what the final levies will be and how the economy will respond.
Currently, the expectation is actively circulating among officials of the central bank of the United States that by December 2025, the cost of borrowing in the United States will be lowered by half a percentage point. This is a consensus assessment regarding the further dynamic of interest rates. Eight policymakers are of the opinion that the Fed should lower borrowing costs once this year or not make such decisions at all.
The equity markets have been showing what can be called stability issues in recent weeks. The corresponding state of affairs is related to investors’ concerns that Donald Trump’s policy changes will put a drag on the growth of the United States economic system. These concerns are especially strong against the background of the expectation that the next round of some kind of tariff confrontation will begin in April.
At the current week, Fed officials said they would slow the pace at which they’re reducing their balance sheet. Starting in April, the central bank of the United States will allow up to $5 billion in Treasury securities to mature each month without being reinvested, down from $25 billion. The cap for mortgage-backed securities remained unchanged. The corresponding figure is $35 billion.
John Williams stated that the decision to slow the runoff was a natural next step as part of the efforts of the central bank of the United States aimed at shrinking its portfolio. According to him, the mentioned move is not a factor generating any consequences for monetary policy.
Moreover, Federal Reserve Governor Christopher Waller said on Friday that he was against the decision of the US financial regulator this week to slow the pace of reduction of its securities holdings. Mr. Waller explained his point of view by saying that currently, the level of reserves in the banking system remains abundant.
Christopher Waller stated that reducing the Fed’s balance sheet is an important part of normalizing monetary policy implementation and reducing unneeded reserves in the banking system. According to him, a further slowdown or stopping redemption of securities holdings will be appropriate as approaching the ample level of reserves. He claims that the relevant situation has not yet become a reality. Currently, reserve balances exceed $3 trillion. According to Christopher Waller, the mentioned level is abundant. He stated that there is no evidence from money market indicators or his outreach conversations that the banking system is getting close to an ample level of reserves.
The decision, opposed by Mr. Waller, as noted by the media, was made amid concerns that an impasse in Congress over lifting the government borrowing limit could obscure how much bank reserves are actually shrinking, risking potential market disruptions once lawmakers eventually raise the debt limit.
