Federal Reserve governor Adriana Kugler said Monday that steeper tariffs will drive prices higher, acting to push down incomes and lower economic growth.
“Although higher tariffs on US imported goods may affect our macroeconomy through many channels … I think they will primarily act as a negative supply shock, raising prices and decreasing economic activity,” Kugler said in a speech in Dublin, Ireland.
Kugler’s comments come even as the US and China have agreed to deescalate and slash tariff rates by 115 percentage points for 90 days as both sides discuss fairer trade between the two countries.
The move will drop American tariffs on Chinese goods, which currently run as high as 145%, to 30% and slash China’s retaliatory duties from 125% to 10%.
“Trade policies are evolving and are likely to continue shifting, even as recently as this morning,” she noted.
Read more: What Trump’s tariffs mean for the economy and your wallet
Federal Reserve governor Adriana Kugler, in 2023. (Photo by Drew Angerer/Getty Images) ·Drew Angerer via Getty Images
Given what Kulger sees as upside risks to inflation and a “somewhat restrictive” level on interest rates now, she said she supported holding rates steady at the policy meeting last week.
Read more: How the Fed rate decision affects your bank accounts, loans, credit cards, and investments
“Ultimately, I see the US as likely to experience lower growth and higher inflation,” she said.
Traders on Monday pushed the odds of a rate cut in June down to 8% and scaled back their bets on number of cuts for the year to 2. They now don’t expect a first cut until September.
Kugler is the latest central bank policymaker to warn about higher inflation, elevated unemployment, and slower economic growth this year, following similar comments Friday from Federal Reserve governor Michael Barr and New York Fed president John Williams.
The comments from the policymakers highlight the dilemma for the central bank as it tries to weigh both sides of its mandate — stable prices and maximum employment — at a time when the true effects of White House trade policies on the economy are still unknown.
Their warnings also echo observations recently expressed by Fed Chair Jerome Powell, who on Wednesday reiterated that he would wait for greater clarity on the impact of Trump’s tariffs before deciding on a path for monetary policy going forward.
All Fed officials on Wednesday voted unanimously to maintain the Fed’s benchmark interest rate in the range of 4.25% to 4.5%, a mark reached at the end of 2024 after cutting rates by a full percentage point last fall.
Federal Reserve Chairman Jerome Powell. (AP Photo/Jacquelyn Martin) ·ASSOCIATED PRESS
The White House is intensifying its pressure on the Fed to consider lowering rates to cushion any future economic slowdown.
Trump himself has repeatedly called for the Fed to ease its policy stance and did so again in the Oval Office on Thursday, saying Powell didn’t want to lower rates because “he’s not in love with me.” He also resurfaced his contention that Powell has a history of moving too late on monetary policy.
“‘Too Late’ Jerome Powell is a FOOL, who doesn’t have a clue,” Trump said in a separate social media post on Thursday.
The 90-day pause announced by the US and China on Monday does alleviate some pressure, and investors responded by sending stocks higher.
But Kugler said changes in trade policy appear likely to generate significant economic effects even if tariffs stay close to the currently announced levels, and that uncertainty associated with tariffs has already impacted the economy through front-loading, sentiment, and expectations.
The Fed governor said that while uncertainty remains about the ultimate level of the average tariff rate, currently announced average tariffs are still “much higher” than in the past many decades.
Kugler warned that if tariffs remain significantly larger relative to earlier in the year, the same is likely to be true for the economic effects, which she says would include higher inflation and slower growth.
Given what she expects to be price increases from tariffs, she said she expects incomes adjusted for inflation will fall and businesses operating costs will rise, which will lead consumers to demand fewer final goods and services and firms to demand fewer inputs.
Over time, Kugler said there could also be significant effects on productivity. As firms adjust to the higher parts costs and lower demand, she said they could cut back on capital investment and shift to a less-efficient combination of parts.
In the near term, Kugler expects higher import costs will raise prices for both consumer goods and inputs to production. While she says imported goods only represent 11% of GDP, she warned tariffs on so-called intermediate goods — parts used to make products, like aluminum and steel — could impact the prices of many goods and services.
Kugler referenced comments from the Dallas Fed’s survey of Texas business executives, which found that 55% of businesses expect to pass through most or all of the costs from higher tariffs to customers.
Of those expecting to pass on costs, 26% expect to pass through the higher tariff cost upon the announcement of tariffs, and 64% expect this pass-through to occur within the first three months after the tariffs take effect.
Kugler noted that this suggests to her that price increases may occur soon.
On inflation, Kugler said she has noted the increase in longer-term inflation expectations from the Michigan survey, which reached the highest level since June 1991.
Read more: How to protect your savings against inflation
“With inflation and employment potentially moving in opposite directions down the road, I will closely monitor developments as I consider the future path of policy,” she said.
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