Federal Reserve governor Adriana Kugler warned Thursday she sees the risk of higher inflation from tariffs and supports keeping interest rates steady for now.
“I see greater upside risks to inflation at this juncture and potential downside risks to employment and output growth down the road, and this leads me to continue to support maintaining the FOMC’s policy rate at its current setting if upside risks to inflation remain,” Kugler said in a speech at the Economic Club of New York.
Kansas City Fed president Jeff Schmid also said Thursday he is very focused on the risk for higher inflation from tariffs and that the Fed should “not let down our guard.”
“While the tariffs are likely to push up prices, the extent of the increase is not certain, and likely will not be fully apparent for some time,” Schmid said in a speech in Kansas City.
The Fed next meets on June 17-18 and is not expected to make any changes to monetary policy. It has not altered its benchmark rates so far in 2025 after reducing them by a full percentage point at the end of 2024, citing uncertainties about President Trump’s policies.
“I view our current stance of monetary policy as well-positioned for any changes in the macroeconomic environment,” Kugler added Thursday.
Schmid noted that “the extent of the drag on growth and employment is also unclear but “I intend to remain focused on the importance of maintaining credibility on inflation.”
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A divide is emerging among Fed policymakers about whether to hold rates steady for some time or get more comfortable about cuts later this year as officials try to determine whether any inflation coming from President Trump’s tariffs will prove to be longer-lasting.
Some policymakers are arguing for “looking through” the impact of the duties as temporary, a stance that would leave the door open for cuts. Many on the rate-setting committee, however, believe there is a risk that inflation from tariffs could become more persistent.
Outgoing Philadelphia Fed president Patrick Harker said Thursday in his last speech before he retires at the end of the month that he favors holding rates steady in the face of policy uncertainty.
“We do not yet have a clear picture of the ultimate impact on inflation and employment of the changing economic policies and priorities in Washington,” he said. “Top of mind are the potential impacts of tariff policy.”
Harker said it is “entirely possible” that the Fed will be facing both upward pressures on prices and rising unemployment.
Kugler said she expects higher tariffs this year will continue to push up inflation over 2025. She referenced research from the Federal Reserve staff, which estimates that 20% tariffs on Chinese imports earlier in the year raised overall inflation, as measured by the “core” Personal Consumption Expenditures index, by 0.2%.
But since tariffs on China are higher than 20%, and tariffs have increased for other countries, she added, “these results tell me, first, that the pass-through of tariffs into prices is relatively quick, and, second, should elevated tariffs persist, even just in the short run, larger effects may be coming soon.”
She added a surge in imports to get ahead of higher tariffs earlier this year has delayed the price effects associated with those tariffs and the reversal in that surge that she expects in the next few months will likely signal larger price increases.
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Kugler is also eyeing three channels through which tariffs could lead to longer-lasting inflation. She warned an increase in short-term inflation expectations could give businesses leeway to raise prices, increasing the persistence of inflation. Companies could also take advantage of price increases on goods impacted by tariffs to raise prices on items not impacted by the levies.
As well, Kugler cautioned that tariffs on parts used to make final products could lead to second-round effects on inflation. And the possibility of lower productivity, Kugler said, could also push up prices.
Meanwhile, Kugler says so-called soft data — surveys of businesses and consumers — suggest that price increases are coming. Kugler pointed to surveys for May showing indexes for inputs and selling prices being elevated relative to the beginning of the year, and that probably reflects the effects from higher tariffs.
On the consumer side, she pointed to a handful of recent surveys including one from the University of Michigan that have shown short-term inflation expectations rising. Michigan’s survey also revealed a pop up in longer-term inflation expectation.
But she noted that she still sees stability in most measures of longer-run inflation expectations.
Right now, Kugler says the job market remains resilient, but warned that trade and other policy changes could raise the unemployment rate.
And while the economy looks to be on solid footing based on official data measures, she noted that the Fed’s May Beige Book showed stagnation, suggesting the economy might be starting to slow.
Kansas City Fed’s Schmid noted that economic theory might suggest that monetary policy should look through a one-time increase in prices from tariffs and that so far most measures of long-term inflation expectations remain anchored.
But that “this is not a signal that we should let our guard down.”
Schmid pointed out that while recent inflation data has been subdued, the expectation is that tariffs will start to show through to prices in the coming months.
Schmid said he is “optimistic” that the economy can continue to grow in part because of what he called “considerable momentum” in recent years based on a strong job market that led to higher incomes and more spending, which in turn supported more jobs.
Harker of the Philadelphia Fed does not see any “dangerous cracks” in the foundation of the economy, but noted there are “stressors.”
“America’s economy remains resilient,” he said.
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