Inflation is not a "one-time deal": Federal Reserve officials issue warnings, concerned that tariffs could trigger persistent inflation or even stagflation

Despite traditional economic models suggesting that tariffs would only lead to a one-time inflation shock, several Federal Reserve officials expressed rare and strong concerns on Tuesday, believing that Trump's repeatedly wavering and overly delayed tariff policies could trigger more persistent and complex inflationary pressures, causing lagging impacts on the economy and employment. Chicago Fed President Austan Goolsbee even stated that the White House's trade policy could lead to "stagflation" in the U.S.

Federal Reserve Governor Cook: Low inflation data may be reversed by tariffs

Federal Reserve Governor Lisa Cook expressed her concerns about the current progress of inflation during a speech at the Council on Foreign Relations in New York on Tuesday, noting that recent low inflation data might be reversed due to the gradual transmission of U.S. tariffs.

She also mentioned that President Trump's latest moves on trade policy could impact the job market, although the overall economic situation remains relatively good.

"I won't comment on government policy. But I will study the economic impact of these policies, and currently, they seem to be increasing the likelihood of rising inflation and a cooling labor market."

Regarding disinflation, Cook pointed out that there has indeed been progress recently. According to data released last week, which aligns with the Fed's preferred indicators, the core inflation rate in April was 2.5%, while overall inflation was 2.1%.

However, most economists generally believe that tariffs will raise costs. While Fed officials typically consider the impact of tariffs on prices to be a one-time event, the broad scope of tariffs under the Trump administration may change that assessment. She stated:

"Price increases associated with changes in trade policy may hinder further improvement in inflation in the short term. The experience of high inflation post-pandemic may make businesses more willing to raise prices and make consumers more likely to believe that high inflation will persist."

Cook did not disclose when she believes the Fed could lower interest rates. She stated that the current policy rate is at a position that "can respond flexibly," allowing the Fed to react in a timely manner based on dual goals of employment or inflation.

"I believe the U.S. economy remains in a robust state, but rising uncertainty poses risks to price stability and employment. In making decisions, I think it is very valuable to continue learning from economic history. Our recent historical experiences provide useful lessons on how to make policy judgments during times of high uncertainty and rising risks."

Bostic: Uncertainty in tariff policy and slow pace may not just lead to one-time price increases

On Tuesday, Atlanta Fed President Raphael Bostic stated that he expects only one interest rate cut this year, as "most inflation indicators are still sounding alarms."

In assessing the impact of tariffs on inflation, standard economic models typically suggest that this should only lead to a one-time price increase. However, Bostic indicated that the uncertain and slow pace of the Trump administration's tariff imposition makes the actual situation much more complex than the theories in textbooks.

"Textbooks say that once tariffs are implemented, everyone will know what has happened, but the actual environment over the past few months has not been like that. So the question is, how will people respond to a continuous, phased increase process?"

Bostic stated that he is most concerned about how this prolonged, gradual implementation of tariffs will affect the behavior of businesses and consumers. If companies and households begin to expect that tariffs will continue to be adjusted in the future, this expectation could lead to more persistent inflationary pressures. This situation also makes it more difficult for the Federal Reserve to assert whether the price increases caused by tariffs are indeed one-time events.

"If we are discussing similar issues every week or month, it could trigger a psychological response."

"Right now, we don't know where this process will lead, so I won't take a clear stance; I will remain vigilant and continue to monitor."

Goolsbee: Tariffs May Lead to "Stagflation"

Chicago Fed President Goolsbee stated on Tuesday that inflation caused by the increase in U.S. tariffs may soon become apparent, but the economic slowdown triggered by tariffs will take longer to reflect in the data.

Goolsbee made these remarks at an event hosted by the Corridor Business Journal in Cedar Rapids, Iowa, stating that CEOs have already signaled plans to pass on some or all of the tariff costs to consumers, so price increases may appear in inflation data within a month.

"If it really has a significant impact on prices, it will definitely be reflected in the data within a few months."

He noted that if higher costs ultimately lead to an economic slowdown, "that part of the impact will take longer to show up in the data."

Aside from the time lag, Goolsbee believes that Trump's trade policy may push the economy toward a state of "stagflation," where economic growth stagnates while inflation rises.

"Job losses, tariffs driving up prices, and what the central bank should do in this situation—there is no ready-made manual for that."

Goolsbee also mentioned that if future tariff policies settle down, and if the U.S. economy looks similar to how it was before Trump announced a series of unexpected tariff measures on April 2, then the Federal Reserve could lower short-term interest rates "to a level significantly lower than it is now." However, he added:

"But given the current uncertainty, I can't express this view too confidently, because who knows? What if we wake up tomorrow and find that tariffs are going to be raised to 50% globally? Many American companies would suffer, and we would have to find a way to cope."

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