Chicago Federal Reserve president Austan Goolsbee described President Trump’s wide-ranging tariffs as “stagflationary” on Friday, expressing a mainline view of tariffs among central bankers that’s prompted the Fed to maintain its pause on interest rate cuts, much to the frustration of the president.
“I think of tariffs as having a heavy stagflationary component,” he said on the CNBC television network.
The term “stagflation” refers to the dreaded combination of rising prices and slowing growth, which aren’t supposed to happen at the same time under normal economic conditions. Prices usually rise more quickly when the economy is expanding, and prices tend to rise less quickly when the economy is weaker.
Recent economic data has broken with the accustomed correlations, as many economists have regarded tariffs as a shock to economic supply. The consumer price index has ticked up to a 2.7-percent annual increase since Trump’s tariffs were first announced in April, and wholesale inflation, taking out food and energy, increased in July at the fastest monthly pace since 2022.
Meanwhile, the job market has sputtered, adding a total of just 106,000 jobs since May, well below the 80,000 to 100,000 jobs needed every month to sustain regular workforce attrition.
Goolsbee distinguished “transitory” inflation coming from tariffs from inflation that the Fed needs to be “responding to.” He mentioned secondary effects like “wage-price spirals” — positive feedback loops between increased unit labor costs and higher prices.
“It’s going to be raising the cost of production for domestic manufacturing and others, and that a lot of times … [takes] time to wind its way through the economy,” he said.
Tariffs are taxes on foreign goods and services. They’re directly paid by American importers, but they can ultimately be borne by importers, exporters, manufacturers, wholesalers, retailers or by consumers in the form of price increases.
They can have complex effects on the economy too, reducing demand for specific goods and causing companies to alter their supply chains. The costs can be taken out of margins or passed along in the value chain. Businesses can also change their production schedules to maintain ratios between costs and markup. Total U.S. capacity utilization has ticked down slightly since February, though it’s still humming around 77 percent.
Revenues from customs duties, which are mostly tariffs, topped $100 billion earlier this summer for the first time during a fiscal year. Duties were $23 billion in May, $27 billion in June, and $28 billion in July. The Congressional Budget Office estimated earlier this year that tariff revenues, including their debt-service effects, would reduce federal deficits by $3 trillion over the next decade.
While Goolsbee stressed Friday the stagflationary concerns about tariffs that Fed Chair Jerome Powell has also frequently discussed, not all members of the Fed’s interest rate-setting committee share his views.
During the Fed’s July meeting, two governors dissented from the majority opinion to pause rates for the first time in thirty years. Governors Christopher Waller and Michelle Bowman both thought rates should be lowered by a quarter percent.
The dissents followed a relentless pressure campaign from the White House on the Federal Reserve that saw Fed Governor Adriana Kugler resign from the board earlier this month. She was replaced by White House Council of Economic Advisers chair Stephen Miran, who is likely to add more pressure on the Fed to lower interest rates in keeping with Trump’s demands.
Futures markets were predicting a quarter-point rate cut in September with 91 percent probability on Friday.
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