Federal Reserve’s Susan Collins Warns of Longer-Term Inflationary Effects from Tariffs
Original article by Eren Sengezer, FXStreet (2024-05-22): “Fed’s Collins: Don’t rule out a larger and more persistent impact of tariffs on inflation”
Federal Reserve Bank of Boston President Susan Collins recently spoke on the evolving U.S. economic landscape during a keynote address, touching particularly on the implications of tariffs on inflation, consumer spending, and monetary policy. With renewed geo-economic tensions and the return of tariff talk in political discourse ahead of the 2024 U.S. presidential election, Collins emphasized the need to carefully assess both the short-term and long-term implications of potential trade restrictions and their influence on price stability.
Key Takeaways from Collins’ Remarks
Collins’ comments reflect a broader concern within the Federal Open Market Committee (FOMC) that surging tariffs could disrupt inflation progress. Speaking on Wednesday, May 22, 2024, she warned about the underestimated and possibly “more persistent” consequences of import tariffs, particularly on consumer goods. These implications could undermine progress in reducing inflation to the Fed’s long-term target of 2 percent.
Highlights from her speech include:
– The economy’s underlying strength persists despite high interest rates.
– Inflation has seen notable progress but remains above the 2 percent target.
– Potential tariff increases could cause inflationary pressure in the near and medium term.
– Tariffs could have lasting effects on price levels and business expectations.
– The Fed must stay cautious and data-driven in approaching future policy moves.
Collins stated, “While tariffs are often considered a one-time price level shock, we should not rule out a larger and more persistent impact on inflation dynamics.” This point underscores the evolving discussion among central bankers and economists concerned about the interaction between trade policy and monetary policy.
The Current State of Inflation and Economic Resilience
The Consumer Price Index (CPI) for April 2024 indicated 3.4 percent year-over-year inflation, according to the Bureau of Labor Statistics. Though inflation has cooled from its 2022 peak of over 9 percent, it continues to hover well above the Federal Reserve’s 2 percent inflation target. The Fed’s preferred gauge, the Personal Consumption Expenditures (PCE) Price Index, is set for release on May 31, and that data will provide a more comprehensive picture of core inflation trends.
Meanwhile, the U.S. economy has shown resilience:
– Unemployment remains low at around 3.9 percent.
– GDP growth for Q1 2024 was revised down to 1.6 percent but remains in positive territory.
– Consumer spending remains robust, although higher financing costs are starting to affect household debt.
This combination of a strong labor market and stubbornly high inflation places the Fed in a challenging position. Rate cuts appear unlikely in the very near term, particularly when inflation expectations remain elevated and geopolitical uncertainty from tariffs persists.
Political Climate and Policy Uncertainty
As the U.S. gears up for the 2024 presidential election, trade policy has returned to center stage. Former President Donald Trump, who is running for re-election, has floated the idea of imposing a 10 percent universal tariff on imports. This proposal, marketed as a way to protect American manufacturing, has raised alarm among economists who fear it could stoke inflation and provoke retaliatory measures from trade partners.
Additionally, President Joe Biden’s administration has not shied away from using tariffs either. In early May 2024, the Biden administration announced a set of new tariffs on Chinese electric vehicles, semiconductors, and solar products, citing national security and fair trade concerns. Biden authorized the increase of duties up to 100 percent on Chinese EVs, sharply escalating trade tensions.
Together, these measures create an uncertain trade environment and raise several important considerations:
– Tariffs lead to higher input costs for U.S. manufacturers.
– Consumer prices rise, especially for imported goods.
– Tariff
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