Jerome Powell Details Possible Risks Of Tariffs On Increasing Inflation

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At the Economic Club of Chicago, Federal Reserve Chair Jerome Powell was asked about the effects of tariffs on inflation.

Transcript

00:00Talk a little bit more about tariffs.

00:02I mean, you recognize that some of the effects of the tariffs will be one-off, transitory,

00:08but you also have said that perhaps they will give room for a number of firms to raise prices.

00:15You mentioned dryers.

00:16When washing machine prices went up because of tariffs,

00:20dryer prices also went up in tandem, even though they weren't tariffed.

00:25What's your sense about the effects of tariffs on inflation?

00:30What would make them more persistent?

00:33And what would make them have effects on growth?

00:38So kind of a simple starting point is one tariff comes in that gets passed along in prices and raises inflation,

00:46but it's just a one-time thing.

00:48So the price level goes up, and that's it.

00:51And that can happen in some circumstances, but it depends on a number of things which we don't know yet,

00:57and I would point to a couple of them, or three of them, actually.

01:00One is just the size of the effects.

01:01And as I mentioned, the tariffs are larger than forecasters had expected,

01:07certainly larger than we expected, even in our upside case.

01:11We looked at a range of cases.

01:12So that's one.

01:13The second one is how long does it take for the tariffs to have their effects on inflation?

01:18To the extent it takes longer and longer, that raises the risks that the public will begin to experience higher inflation.

01:27They'll come to expect it, and companies will come to expect it.

01:30So that risks higher inflation.

01:33And the third is just what I mentioned in my speech, which is my remarks, which is got to keep inflation expectations well anchored.

01:40So if we have those three things under control, that's what it will take.

01:46And indeed, our role is to make sure that this will be a one-time increase in prices

01:52and not something that turns into an ongoing inflation process.

01:56That's a big part of our job.

01:58What about the effects of tariffs on quantities?

02:03You know, with the level of tariffs that, for example, have been currently applied on China,

02:07there's a fear that the supply chain may get disrupted,

02:11that firms may not be able to import their relevant stuff from China, given the level of prices.

02:19If it turns into a supply shock, would the Fed's response be different

02:25than if it was primarily something which affected just prices.

02:30So I actually had dinner at the Chicago Fed last night

02:33with a number of directors of various parts of the Chicago Fed,

02:37and many of them are CEOs of significant companies,

02:42and this uncertainty that they're feeling

02:46and the issue with imported components to their products is just a huge issue.

02:51But if you look back at the pandemic, if you remember,

02:58there was a shortage of semiconductors,

03:00and that led to a shortage of cars at a time of extremely high car demand.

03:04And it was a prolonged shortage because production couldn't keep up,

03:09and that led to an extended period of inflation.

03:13So when you think about supply disruptions,

03:15that is the kind of thing that can take time to resolve

03:19and that can lead what would have been a one-time inflation shock

03:23to be extended, perhaps more persistent, and we would worry about that.

03:26In this case, you can look at the car companies,

03:29which their supply chains likely seem to be on track to be disrupted significantly,

03:35and you would worry that that process will take some years

03:38and that the inflationary process might be extended.

03:41So all of this is highly uncertain.

03:45We're thinking now, really, before the tariffs have their effects,

03:49how they might affect the economy,

03:51and that's why we're waiting, really, to see what the policies ultimately are,

03:55and then we can make a better assessment of what the economic effects will be.

03:59Okay.

04:00Okay.

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