Chicago Fed leader worried that tariffs may cause lasting inflation

Concerns Over Inflation from Chicago Fed President

On Tuesday, Austan Ghoolsby, President of the Federal Reserve Bank of Chicago, expressed concerns regarding rising inflation and the uncertainty of whether recent tariff-related price increases are temporary or could lead to more lasting challenges for policymakers.

Speaking at the Midwest Agricultural Conference, Ghoolsby noted the recent spike in inflation followed a period of relief from the 40-year highs reached in 2022, particularly influenced by the pandemic’s aftermath. “I was anxious, spending over four years dealing with inflation that stayed just above the target,” he shared. “Now, however, we’re seeing a reversal; inflation has been climbing for several months.”

Ghoolsby suggested that while he hoped the inflation rise was just a transient issue, he warned that if inflation became more entrenched, similar to trends seen in 2021 and 2022, it could create significant difficulties for the Federal Reserve.

He emphasized the dual challenge the Fed faces: “We have a legal mandate to maximize employment while stabilizing prices. Usually, as one improves, the other worsens. When we see low unemployment, inflation becomes a problem, and during a recession, the reverse holds true. What complicates things is when both sides worsen simultaneously—it leaves us in a tough position.”

The labor market has cooled recently, which poses a dilemma as the first interest rate cuts are anticipated in September 2025. Ghoolsby highlighted the Fed’s mandate to steer clear of scenarios that deviate too much from these dual goals.

Recently, Fed Chair Jerome Powell pointed out that high inflation, combined with a fragile labor market, presents a substantial risk to economic stability. The current inflation rates, exceeding the Fed’s target of 2%, raise questions about the wisdom of involving rate hikes to support the labor market, especially since it could further dampen job growth.

Ghoolsby introduced the concept of the “11% lane” to assess the impact of customs duties, emphasizing that imports constituted a significant 11% of the U.S. GDP in 2024. He expressed concern that tariffs affecting intermediate goods, which are essential in manufacturing finished products, could have broader economic implications.

He stated, “That’s what I want to avoid. I hope the effects of the recent increase remain confined to that 11% GDP range. However, I’m apprehensive when it comes to tariffs on intermediate goods.” Ghoolsby also remarked that rising service costs might suggest that tariff-induced inflation is not merely a temporary spike, contrary to his hopes.