By Michael S. Derby
NEW YORK (Reuters) -Federal Reserve Bank of Chicago President Austan Goolsbee said Thursday high levels of uncertainty amid very aggressive trade tariffs argues for a wait-and-see approach to monetary policy, amid signs the U.S. government bond market is holding up under a period of high stress.
“I don’t think you should ever take anything off the table– that’s increases, cuts, holding the same–but the circumstance that we’re in now, where there are a lot of major question marks, is more like we need to wait-and-see how these things are getting resolved,” Goolsbee told reporters after giving remarks before a gathering of the Economic Club of New York.
The bar for action on monetary policy “is a little higher” at the moment as central bankers scour the data to see how the economy is reacting to actions taken by the Trump administration to make a wide range of import prices sharply higher.
Goolsbee noted that the tariffs pursued by President Donald Trump, even as they’ve been pulled back, are still very high and will impact the economy in a way that’s hard for monetary policy to deal with.
“There is not a generic playbook for how a central bank should respond” to the import tax surge, as they create a stagflationary shock, or a period of simultaneous higher inflation and depressed growth, Goolsbee told the broader gathering. While uncertainty is high and problematic, if that can be resolved and inflation can move down amid solid job market performance, “I still think that one to two years, 12 to 18 months from now, rates will be lower than they are today,” he said.
Goolsbee also noted that while financial markets have been under pressure, he said the pain was not unique just to U.S. assets and can be seen in other markets as well. Amid extreme volatility in Treasury yields, Goolsbee told reporters the successful outcome of the government’s 10-year note gave him some “comfort.”
He also told reporters he still sees the U.S. government bond market holding its long-standing role as a safe haven, noting “when there is a flight to safety, it still feels like the safest asset in the world is a long-term Treasury.”
RISK OUTLOOK
Goolsbee spoke a day after President Donald Trump reversed hefty tariffs on dozens of countries while ramping up pressure on China. The change in tariffs unleashed a global stock rally on Wednesday, but U.S. stocks reversed course on Thursday.
Some major banks have forecast that the economy will soon fall into recession. Financial markets have also priced in a more aggressive course of rate cuts, expecting the Fed will need to shift to supporting the job market even with inflation above the Fed’s 2% target and tariffs likely to go higher.
