Inflation concerns heighten for Fed Governor Lisa Cook as tariffs pose challenges for rate-setting policy.
Informal Rewrite:
Here's what Lisa Cook, a top honcho at the Federal Reserve, had to say about the current state of inflation on Tuesday. She shared her worries that the recent drop in inflation could reverse after tariffs started making their way through the economy.
According to Cook, President Trump's moves on trade policy might take a toll on the labor market, but for now, the economy is still doing pretty well.
"Now, I don't express my opinions on the Administration's policies. But I sure as heck study the economic implications, which seem to be making it more likely that we'll see both higher inflation and a cooling labor market," Cook said in a speech to the Council on Foreign Relations in New York.
Inflation-wise, things have improved. Core inflation is at 2.5%, and headline inflation is at 2.1% for April, as per a report last week that used the Fed's preferred measure. But economists expect the tariffs to push costs up even higher. Fed officials usually view tariffs as one-time events for prices, but the wide range of Trump's levies could change the game.
"It seems price hikes as a result of changes in trade policy might make it tough to make more progress in the short term," Cook said. "The recent post-pandemic experience with high inflation has made firms more willing to raise prices and consumers more likely to expect high inflation to stick around."
Indeed, a survey-based measure of inflation suggests a significant spike over the next year. Market-based measures, however, indicate more mild expectations for the future.
Insight: Economic Implications of Trump Tariffs
Trade tariffs implemented by the Trump administration could lead to increased inflation due to higher production costs for industries that rely on imported materials. Additionally, these tariffs could disrupt supply chains and lead to job losses in heavily reliant industries. Conversely, tariffs might protect domestic industries, potentially leading to job creation within those sectors. overall economic growth and market volatility could slow down due to increased costs for businesses and consumers, and uncertainty surrounding trade policies.
Cook's comments arrive two weeks ahead of the Fed's next policy meeting on June 17-18. The market's expectations are overwhelmingly that the central bank will maintain its hold on interest rates, and most policymakers' statements since the last meeting support this view. Traders expect the next Fed cut to happen in September.
Cook didn't specify when the Fed can ease again, saying current policy leaves room for her and her colleagues to respond to threats to the Fed's mandate for full employment and low inflation.
"In my opinion, the U.S. economy is still in a solid position, but uncertainty poses risks to both price stability and unemployment. When making decisions, it's been valuable to keep learning about economic history. Our recent past has given us some useful lessons for decision-making during periods of high uncertainty and elevated risks to our dual-mandate goals," she added.
Earlier in the day, Atlanta Fed President Raphael Bostic said he expects just one rate cut this year, as "most of the [inflation] measures are still flashing red." But in a speech over the weekend, Fed Governor Christopher Waller said he expects tariffs to have less impact than anticipated, with effects mainly in the second half of the year, potentially allowing the Fed to make textbook-worthy rate cuts before the end of 2025.
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- Lisa Cook, a Federal Reserve official, has voiced her concerns that President Trump's trade policies, specifically tariffs, could lead to increased inflation and a cooling labor market.
- Inflation rates have shown improvements, with core inflation at 2.5% and headline inflation at 2.1% for April, but economists anticipate that tariffs could push costs even higher.
- The impact of tariffs on markets and finance is a topic of ongoing discussion, with some analysts suggesting that they could disrupt supply chains, leading to job losses, while others posit that they might protect domestic industries and stimulate job growth.
- Amid the uncertainty surrounding trade policies and their economic implications, the Federal Reserve is expected to maintain its hold on interest rates in its upcoming meeting on June 17-18.
- Economic historians and policymakers are emphasizing the importance of understanding economic history during periods of high uncertainty and elevated risks, as lessons from the recent past can help guide decision-making in such situations.
