The Trump tariff stick strikes, the most dovish Federal Reserve official turns to "cautious rate cuts": inflation may return

According to the Zhitong Finance APP, Austan Goolsbee, the Chicago Federal Reserve Chairman who has long favored a "dovish" monetary policy stance, stated that in the macro context of increased uncertainty brought about by the Trump administration, the Federal Reserve should be more cautious than ever when lowering borrowing costs. "Now we must consider the pace of interest rate cuts more carefully and cautiously, as there is a risk that inflation may rise again," Goolsbee, the most dovish member among the 2025 FOMC voters, said in an interview on the U.S. public media program Marketplace on Monday.

Goolsbee's remarks echoed those of two of his Federal Reserve colleagues, who also mentioned the increased uncertainty regarding the future path of the U.S. economy under policies such as tariffs in separate speeches earlier on Monday. Raphael Bostic, President of the Atlanta Federal Reserve, stated on Monday that he personally prefers to keep current interest rates unchanged until the economic outlook becomes clearer. He emphasized that the Federal Reserve's current primary concern is inflation, not the labor market, as the latter has reached a healthy level while the former has not yet met its target.

U.S. President Donald Trump announced last Saturday, just two weeks after the new administration took office, a significant tariff increase on Mexico, Canada, and China, the three largest trading partners of the United States. On Monday, after reaching separate agreements with the leaders of these countries, the U.S. government postponed tariffs on Mexico and Canada for at least a month.

The tariff policy of the Trump administration has triggered economic uncertainty, which Federal Reserve officials have expressed concerns about, calling for caution in the process of interest rate cuts. The dovish Goolsbee, along with generally hawkish Federal Reserve officials, emphasized that inflation risks may rise again due to tariffs, thus necessitating more prudence in future monetary policy decisions.

Goolsbee stressed that assessing the specific impacts of tariffs is not a simple task for the Federal Reserve.

"It is difficult to distinguish between signs of an overheating economy and the temporary results of an escalation in trade wars or other geopolitical events," Goolsbee emphasized. "We are trying to identify the main signs among so much uncertainty, but we may have to slow down the pace of reaching a stable interest rate."

He also mentioned his conversations with business executives in his Federal Reserve district. "I have to say that my concerns largely come from the business people I talk to," he stated.

Goolsbee's monetary policy stance is considered one of the most hawkish among Federal Reserve officials, and he has been one of the most supportive of the interest rate cut path in recent months.

Federal Reserve policymakers kept the benchmark interest rate unchanged at their meeting on January 28-29, following three consecutive rate cuts at the end of 2024. They indicated at the January rate meeting that they hope to proceed with interest rate cuts at a slower pace this year to allow time to observe the effects of the cuts and the new policies of the Trump administration on the U.S. economy.

"I want to see the impact of the 100 basis points cut we implemented at the end of last year on the U.S. economy and the anti-inflation process," Bostic said on Monday at an event in Atlanta. "Based on the economic data, this may mean we need to wait for a while." Boston Federal Reserve President Susan Collins also supports the idea of the Federal Reserve moving slowly.

"There is no urgency for additional interest rate adjustments," she emphasized. "Economic data will tell us the answer. At some point, I certainly see the Federal Reserve's monetary policy stance further normalizing." Here she refers to the potential "further rate cut process."

The "dot plot" released in December 2024 shows that the expectation for rate cuts in 2025 has been significantly reduced from four times to two times, and the rate expectations for 2026, as well as the market's focus on "neutral interest rates," have been adjusted upward, forcing the U.S. Treasury market to reprice rate cut expectations. Meanwhile, the increasingly rising budget deficit expectations have pushed the "anchor of global asset pricing" to lead yields across various maturities to suddenly turn upward.

Joe Brusuelas, Chief Economist at consulting firm RSM, stated that the U.S. is unlikely to fall into recession this year, but tariffs will harm economic growth and raise government borrowing costs, which could push up mortgage and auto loan rates. He added, "Without a good solution, the impact on the U.S. economy will be significant. Due to inflation and rising interest rates, the economic growth rate will be noticeably lower than the average of 2.9% over the past three years. The current yield of around 4.5% on 10-year U.S. Treasuries could rise to between 4.75% and 5%."