If tariffs are avoided by a deal or other event, the economy could return to a situation where interest rates can be lowered, said Federal Reserve Bank of Chicago President Austan Goolsbee at the Mackinac Policy Conference on Thursday.
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Tariffs could potentially lead to higher inflation, which is combatted with a higher interest rate. At the same time, a higher interest rate restricts corporate growth given a higher cost of borrowing.
Politics Shouldn’t Influence Central Bank Decisions, Says Goolsbee
President Trump’s reciprocal tariffs are currently in limbo as a federal court ruled to overturn them yesterday, arguing that sweeping tariffs breached his limit of power. “If politics controls the interest rate, inflation is coming back,” added Goolsbee.
Furthermore, Goolsbee doesn’t believe that the economy is undergoing stagflation despite being in a “stagflationary direction.” Stagflation occurs when there is high inflation and unemployment paired with slow or negative economic growth. Goolsbee said that the phenomenon is “the toughest scenario for a central bank; that’s not what we are facing now.”
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