Former Federal Reserve Vice Chairman: Trump's trade war may reverse decades of factors that have suppressed inflation
Former Federal Reserve Vice Chairman Donald Kohn stated at an event of the South African Reserve Bank that Trump's trade war could reverse the globalization forces that have suppressed inflation for decades. He pointed out that tariffs could lead to price increases, limit the Federal Reserve's room for interest rate cuts, and present new challenges for the Federal Reserve. Kohn warned that Trump's policies and high budget deficits would put the Federal Reserve in a difficult position
Globalization has been a key factor in lowering inflation over the past few decades, and now the trade war initiated by Trump may reverse this force.
On Thursday, according to media reports, former Federal Reserve Vice Chairman Donald Kohn spoke at an inflation discussion hosted by the South African Reserve Bank. Kohn, a veteran who served 40 years at the Federal Reserve, has been a senior fellow at the Brookings Institution in Washington since leaving the Fed in 2010.
Kohn stated at the event:
Some of the forces that helped lower inflation in the 1990s, 1980s, and 2000s will be reversed.
According to CCTV News, on March 26 local time, U.S. President Trump signed an executive order at the White House announcing a 25% tariff on all imported cars. The related measures will take effect on April 2. Additionally, Trump threatened to impose harsher penalties if the European Union and Canada jointly confront the U.S.
Investors are concerned that price increases due to tariffs may limit the Federal Reserve's room to cut interest rates. It is worth noting that U.S. inflation has significantly slowed since the early 1980s, largely due to the aggressive actions taken by then-Federal Reserve Chairman Paul Volcker.
Kohn further pointed out:
We have already seen adverse supply shocks caused by the tariffs threatened by the Trump administration, as well as potential threats of adverse supply shocks. The tailwinds that once helped suppress inflation may turn into headwinds, which will present some tough decisions for the Federal Reserve.
Kohn warned that the Federal Reserve faces new challenges amid high budget deficits and the president's public calls for interest rate cuts.
Trump has indicated that he will not fire Powell, but he has advocated for lower interest rates. Trump privately discussed replacing him during his first term, and the political pressure on the Federal Reserve will not diminish.
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