At the Mackinac Policy Conference on May 29, 2025, Austan Goolsbee, President of the Federal Reserve Bank of Chicago, addressed the interplay between U.S. trade policies and monetary policy. He suggested that avoiding significant tariffs could enable the Federal Reserve to lower the policy rate from its current range of 4.25%–4.5% toward the long-term neutral rate of approximately 3%. Goolsbee emphasized that tariffs act as a "layer of fat" obscuring the economy's underlying strength and that removing such trade barriers would reveal economic resilience.

Goolsbee's remarks come in the wake of a U.S. Court of International Trade ruling on May 28, 2025, which invalidated former President Donald Trump's "Liberation Day" tariffs. The court determined that Trump exceeded his authority under the International Emergency Economic Powers Act (IEEPA) by imposing these tariffs without congressional approval. The decision permanently enjoined the enforcement of these tariffs, citing that the IEEPA does not delegate power from Congress to the president to create tariffs. The panel's opinion argued that while the president may at times be given limited powers to set tariffs, this does not grant the office "unlimited tariff authority" that Trump had claimed the IEEPA granted.

The "Liberation Day" tariffs, announced on April 2, 2025, imposed a universal 10% baseline tariff on imports from all countries, with additional country-specific tariffs based on perceived unfair trade practices. These measures were justified under the IEEPA, with the administration declaring a national emergency to address the U.S. trade deficit. The tariffs led to significant disruptions in global trade and were met with legal challenges from businesses and states.

Following the trade court's ruling, a federal appeals court temporarily reinstated the tariffs, setting a one-week deadline for responses. This legal back-and-forth has created uncertainty for businesses and policymakers. The administration has appealed the ruling, and the case is expected to proceed rapidly given its urgency. Despite previous deference from the Supreme Court in foreign policy matters, President Trump's defiance of co-equal legal authority and regular criticism of federal judges raise the stakes.

Goolsbee noted that prior to the implementation of these tariffs, the labor market was stable, and inflation was progressing toward the Federal Reserve's 2% target. This environment would have been conducive to lowering interest rates. However, the uncertainty surrounding trade policy has caused hesitation among businesses and constrained the Fed's policy decisions. Additional tariffs could hinder inflation control and increase unemployment, complicating the Fed's mandate.

The legal challenges to the "Liberation Day" tariffs underscore the complexities of using the IEEPA to impose trade measures. The U.S. Court of International Trade's ruling that the tariffs were unlawful highlights the judiciary's role in checking executive power in trade policy. The subsequent temporary reinstatement by a federal appeals court adds another layer of uncertainty.

Economically, the imposition and subsequent legal battles over tariffs have introduced volatility into markets. Businesses face challenges in planning and investment due to the unpredictable trade environment. The Federal Reserve's potential policy rate adjustments are closely tied to these developments, as trade policies directly impact inflation and employment metrics.

Goolsbee's insights at the Mackinac Policy Conference illuminate the complex interplay between trade policies and monetary policy. As legal battles over tariffs continue, the Federal Reserve remains vigilant, assessing how these developments will shape future economic strategies.