Federal Reserve Poised for Rate Cuts Amid Tariff-Induced Stagflation, Says Chicago Fed President

Federal Reserve Bank of Chicago President Austan Goolsbee addressed the Economic Club of New York on April 10, 2025, highlighting the Federal Reserve's readiness to adjust interest rates, including potential cuts, contingent upon economic improvements, despite the prevailing challenges posed by aggressive U.S. trade tariffs.

Goolsbee emphasized the Federal Reserve's cautious, data-driven approach to monetary policy in the face of stagflationary pressures induced by elevated tariffs. He noted that while the Federal Reserve is not ruling out any monetary policy direction—be it rate increases, cuts, or maintaining current levels—the prevailing uncertainty complicates decisive action. "I don't think you should ever take anything off the table—that's increases, cuts, holding the same—but the circumstance that we're in now... is more like we need to wait-and-see how these things are getting resolved," Goolsbee stated.

The backdrop to Goolsbee's remarks includes the Trump administration's implementation of aggressive trade tariffs, notably increasing those on Chinese imports to 145%. While some tariffs have been temporarily paused, significant levies remain, contributing to economic uncertainty and potential stagflationary pressures. Goolsbee highlighted the challenges posed by these tariffs, noting that they create a stagflationary shock—simultaneously driving inflation and slowing growth. "There is not a generic playbook for how a central bank should respond" to such shocks, he remarked.

Despite current uncertainties, Goolsbee expressed optimism that if inflation decreases and the job market remains strong, interest rates could be lower in the next 12 to 18 months. He also acknowledged signs of resilience in the U.S. bond market, despite high Treasury yield volatility and market stress, reaffirming long-term Treasury securities as global safe-haven assets.

Goolsbee underscored the Federal Reserve's commitment to monitoring a broad range of economic data and maintaining anchored long-term inflation expectations, warning that a rise in these expectations could necessitate decisive central bank intervention. "If we see inflation rising or progress stalling in 2025, the Fed will be in the difficult position of trying to figure out if the inflation is coming from overheating or if it's coming from tariffs," he said. "That distinction will be critical for deciding when or even if the Fed should act."

The combination of aggressive trade tariffs and the Federal Reserve's cautious monetary policy approach contributes to heightened uncertainty in financial markets, potentially affecting investment decisions and economic growth. The risk of stagflation—simultaneous inflation and economic stagnation—poses challenges for consumers and businesses, potentially leading to reduced purchasing power and investment. The Federal Reserve's commitment to a data-driven approach and maintaining anchored inflation expectations is crucial for preserving its credibility and effectiveness in managing economic stability.

Austan Goolsbee's recent address underscores the Federal Reserve's cautious and flexible approach to monetary policy in the face of significant economic uncertainties, particularly those arising from aggressive trade tariffs. The Fed's commitment to a data-driven strategy aims to navigate these challenges while maintaining economic stability and anchored inflation expectations.