Federal Reserve governor Adriana Kugler. — Bloomberg
NEW YORK: Federal Reserve (Fed) governor Adriana Kugler says the US President Donald Trump administration’s tariff policies are likely to boost inflation and weigh on economic growth, even with the recently announced reduction in levies on China.
“Trade policies are evolving and are likely to continue shifting, even as recently as this morning,” Kugler said on Monday in remarks prepared for an event in Dublin.
“Still, they appear likely to generate significant economic effects even if tariffs stay close to the currently announced levels.”
The United States and China said they will temporarily lower tariffs on each other’s products to allow the countries to work toward a larger trade agreement.
The United States will reduce tariffs on China to 30% from a combined 145%, while China is lowering its duties on US products to 10% from 125%.
Even so, Kugler noted that average tariff rates in the US are still much higher than they have been in many decades.
“If tariffs remain significantly larger relative to earlier in the year, the same is likely to be true for the economic effects, which will include higher inflation and slower growth,” she added.
Chicago Fed President Austan Goolsbee, speaking separately on Monday in an interview with the New York Times, said the current tariff environment still poses heightened risks of both higher prices and slower growth.
The temporary nature of the US-China tariff deal and overall higher tariff environment will still weigh on the economy, he said.
Additionally, Fed policymakers left the central bank’s benchmark interest rate unchanged last week for a third consecutive meeting.
Kugler said she supported that decision given the upside risks to inflation and because she views the Fed’s policy stance as somewhat restrictive on the US economy.
“With inflation and employment potentially moving in opposite directions down the road, I will closely monitor developments as I consider the future path of policy,” she said.
In a question-and-answer session following her remarks, Kugler said the temporary US-China agreement represented “an improvement” but that the tariffs between the two countries are “still pretty high”.
She still expects an increase in prices and a slowdown in the economy, but not to the same extent as before.
“My basic outlook, in some sense, may have changed in terms of the extent to which we need to use our tools, the magnitude, but not in the direction,” Kugler said.
Kugler said she expects the tariffs to amount to a negative supply shock, leading to weaker economic growth and consumer demand as prices rise.
She said there could also be “significant effects” on productivity, since businesses may cut back on investment and make other less efficient moves to navigate the situation.
Lower demand across the economy could also make it harder for job seekers to find work, she said.
“This lower aggregate demand may then exert downward pressure on inflation, though probably not by enough to offset the effect from the adverse supply shock,” Kugler said. — Bloomberg
