Chicago Fed President: Trump's new tariffs may raise inflation and disrupt the rate cut process

According to the Zhitong Finance APP, Chicago Federal Reserve President Charles Evans stated on Friday that the latest round of tariffs announced by President Trump has made the inflation outlook more complicated and has made it harder for him to support the interest rate cuts requested by Trump.

In recent months, after Trump postponed the implementation of high bilateral tariffs in April, market concerns about tariffs driving up prices have significantly eased, paving the way for the Federal Reserve to cut rates again in the future. However, with the Trump administration announcing a 35% tariff on certain Canadian imports and up to a 50% tariff on Brazilian goods starting August 1, new inflation concerns have resurfaced. Evans pointed out that these measures may force the Federal Reserve to maintain a "wait-and-see" stance until the policy outlook becomes clearer.

"I hope that when we talk to businesses again, they won't say 'this brings us back to the situation on April 3,'" Evans said, "but I'm not sure, because this has just happened."

Since September of last year, the Federal Reserve has begun to lower interest rates, believing that substantial progress has been made in combating the high inflation resulting from the COVID-19 pandemic. However, the brief inflation rebound earlier this year, along with uncertainties regarding trade, immigration, and fiscal policy changes, has kept the Federal Reserve from taking further action, maintaining the benchmark interest rate in the range of 4.25% to 4.5% since December of last year.

Evans is one of the officials within the Federal Reserve who has recently been more actively supportive of another rate cut, alongside Governors Christopher Waller and Michelle Bowman. However, he also stated that given the complexity of Trump's latest round of tariffs, the Federal Reserve needs to be more cautious.

"We keep adding new variables to this already chaotic situation, making it harder to judge 'whether prices will rise,'" Evans said, "it's like throwing another handful of sand into the air."

Notably, inflation data since Trump announced significant tariff measures on April 2 has shown relatively mild performance. According to the Federal Reserve's preferred inflation measure, the 12-month inflation rate as of May was 2.3%, very close to its long-term target of 2%. This figure originally provided a basis for further easing.

However, there is still intense discussion within the Fed about a key question: if price increases driven by tariffs are imminent, will they be a one-time shock or will they trigger a more persistent structural inflation? If it is the latter, the Federal Reserve may have to maintain high interest rates for a longer period to curb inflation risks.

Meanwhile, the overall performance of the U.S. economy remains relatively robust. The unemployment rate hovers around 4%, and while economic activity has slowed, it has not significantly deteriorated, which has led Fed Chairman Jerome Powell and several officials to advocate for a "patient strategy" to avoid hasty rate cuts.

However, Trump's public criticism of Powell and the Federal Reserve, as well as his insistence on low interest rate policies, complicates the Fed's forward direction. Trump will nominate the next Federal Reserve chairman next year, and the market speculates that he will choose a candidate who leans towards easing policies.

White House Council of Economic Advisers Chairman Kevin Hassett, Treasury Secretary Steven Mnuchin, current Fed Governor Christopher Waller, and former Fed Governor Kevin Warsh are all seen as potential frontrunners This Thursday, the White House further pressured Powell, demanding an explanation regarding the cost overruns for the Federal Reserve's renovation at its headquarters in Washington.

In the face of external political pressure, Goolsbee stated that the Federal Reserve will uphold its independence. He said, "I remain very confident that the culture of the Federal Reserve is one that takes its responsibilities seriously, and everyone understands that staying away from political interference is crucial for the independence of our work."