Chicago Fed President Austan Goolsbee warned that Trump’s new tariff regime could trigger a “stagflationary shock” in the U.S. economy. While current economic indicators appear stable, long-term risks surrounding inflation, growth, and trade uncertainty remain.
Goolsbee Raises Alarm Over Tariff Impact
Chicago Federal Reserve Bank President Austan Goolsbee issued a rare and candid warning on Thursday about the potential economic fallout from President Donald Trump’s new tariff policies. Speaking at the Economic Club of New York, Goolsbee said the tariffs act as a “negative supply shock,” posing a risk of stagflation — a combination of stagnant economic growth and high inflation.
The Latest on Trump’s Tariff Measures
Trump recently paused a broad set of reciprocal tariffs he had imposed on multiple countries but simultaneously hiked tariffs on Chinese imports to a striking 145 percent. In response, China raised its tariffs on U.S. goods to 84 percent. Despite these changes, National Economic Council Director Kevin Hassett confirmed that Trump’s 10 percent baseline tariff on most global imports will remain in place.
Fed Concerned About Policy Impact
Goolsbee emphasized that such tariff regimes are significantly more aggressive than what Fed economists had previously projected. He acknowledged that central banks lack a standard response strategy for such stagflationary shocks, underlining the complexity of the current economic environment.
Where the Economy Stands Now
Despite his concerns, Goolsbee noted that the latest hard data presents a positive outlook. The unemployment rate is holding steady at around 4 percent — near historical lows — and inflation recently declined to 2.4 percent, signaling temporary price stability. However, he warned that lingering uncertainty over future inflation and supply chain pressures forms what he called an “iron triangle of uncertainty.”
Fears Among U.S. Businesses
According to Goolsbee, businesses within his Federal Reserve district — including major players in the auto sector — fear a return to the volatility of the pandemic-era economy. Many are particularly concerned that inflation could spiral out of control again, as it did in 2021–2022.
Importance of Fed’s Independence
Goolsbee reiterated the need for the Fed to remain politically independent in order to effectively respond to economic crises. He recalled Trump’s previous attempts to pressure or remove Fed Chair Jerome Powell during his first term and highlighted how such interference could hinder future responses similar to those under former Fed Chair Paul Volcker, who curbed runaway inflation in the 1980s through painful interest rate hikes.
A Historical Perspective on Stagflation
While the U.S. economy is far from the double-digit inflation and unemployment rates seen in the 1970s and early ’80s, Goolsbee cautioned against complacency. He emphasized the need to remain vigilant as the combination of slowing growth, elevated prices, and global trade disruptions may still pose future risks.
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