(Yahoo! Finance) - Federal Reserve officials appear to have a unified message this week on the question of how they are reacting to President Donald Trump’s new tariffs.
Fed vice chair Philip Jefferson said, "I do not think we need to be in a hurry to change our stance." San Francisco Fed president Mary Daly said, "We don’t need to be preemptive." Richmond Fed president Tom Barkin said Wednesday that "you want to wait and see."
The consistent call for caution among policymakers came as Trump announced 25% tariffs on Mexico and Canada, only to then pause them for 30 days. He also slapped a 10% tariff on Chinese imports, a levy that remains in place.
Some economists are concerned these policies could push inflation higher, creating new challenges for a central bank still trying to get inflation back down to its 2% target.
Chicago Fed president Austan Goolsbee said Wednesday that if inflation remains persistent, the question for the Fed will become whether those price pressures are from new tariffs or increased demand.
"If we see inflation rising or progress stalling in 2025, the Fed will be in the difficult position of trying to figure out if the inflation is coming from overheating or if it’s coming from tariffs," Goolsbee said in a speech Wednesday in Detroit.
"That distinction will be critical for deciding when or even if the Fed should act."
The Fed’s new wait-and-see approach follows a decision last month to hold rates steady after three straight cuts. Trump said Sunday night that was the 'right thing to do."
That cautious stance was reinforced last week with a fresh reading from the central bank's preferred inflation gauge that showed prices remained sticky in the final month of 2024.
The "core" Personal Consumption Expenditures (PCE) index, which strips out food and energy costs, rose 2.8% over the prior year during the month of December — stuck at the same year-over-year level recorded in November.
On a month-over-month basis, "core" PCE rose 0.2%, faster than the 0.1% seen in November.
Now some Fed watchers are concerned that the tariff talk could dial back any hope of rate cuts in 2025. Fed officials last December predicted two, down from a prior estimate of four.
Goolsbee said in his speech Wednesday that passing over the threat of large tariffs and the potential for an escalating trade war and potential consequences "would be a mistake."
He pointed to economic theory, which suggests that a tariff is a one-time increase in costs if there is no retaliation. Therefore, its impact on inflation should be transitory and the central bank could theoretically ignore it when setting monetary policy.
But compared with Trump’s first trade war in 2018, tariffs this time around may apply to more countries or more goods or at higher rates, Goolsbee noted, in which case the impact could turn out to be larger and longer lasting.
What matters for how tariffs impact inflation is the degree to which products can be substituted, he added.
If companies have diversified their supply chains in the last five years because of the pandemic to make them more resilient, they might be able to avoid price increases by shifting production away from countries targeted with tariffs.
But if certain products — parts and components — cannot be substituted, "the impact on inflation might be much larger this time," he said.
Almost half of US imports are parts and components, according to the Chicago Fed. And many suppliers, Goolsbee said, are concerned they will have to eat the higher costs.
Another voice of caution this week came from Fed vice chair Philip Jefferson.
"If the economy remains strong and inflation does not continue to move sustainably toward 2%, we can maintain policy restraint for longer," he said in a speech Tuesday night.
Alternatively, Jefferson underscored if the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, "it may be appropriate to reduce" rates more quickly.
Jefferson says he expects inflation’s slow drop to continue, and that the path down to the Fed's target will continue to be "bumpy." He also expects economic growth and the job market to remain "solid."
Atlanta Fed president Raphael Bostic said Monday he also wants to be “cautious” when it comes to setting monetary policy given that the amount of uncertainty now is greater than at the end of last year, which was already uncertain.
"I'm really taking the posture that I'm going to have to wait and see, and there are a lot of things I'm going to have to wait and see about before I'll feel confident that I know which direction policy can go," Bostic said in Atlanta.
“I don't want to have our policy lean in a direction, making the assumption that the economy is going to evolve a certain way, but then I have to turn and unwind,” he added.
San Francisco Fed president Mary Daly said Tuesday she too is in no rush to lower interest rates and a solid economic backdrop gives the Fed the luxury of time to hold policy where it is until inflation comes down further.
"We can take our time to look at what’s coming in, both on the economy and any policy changes," she said.
"We don’t need to be preemptive."
By Jennifer Schonberger - Senior Reporter
