Higher inflation, slower growth and economic uncertainty are the catchphrases for the economy going into the next year, largely because of increased tariffs and policy changes for them, a Federal Reserve governor said Monday.
Speaking to the International Economic Symposium in Dublin, Ireland (cohosted by the National Association for Business Economics (NABE) and the Central Bank of Ireland), Fed Gov. Adriana Kugler said expected price increases due to recent tariff announcements by President Donald Trump (R), will mean real incomes will fall, and operating costs will rise, which will lead to “consumers to demand fewer final goods and services and firms to demand fewer inputs.”
She noted that the administration’s trade policies are evolving and likely to continue shifting, even as recently as Monday morning when U.S. and China negotiators announced a temporary reduction in mutual tariffs against each other.
“Ultimately, I see the U.S. as likely to experience lower growth and higher inflation,” Kugler said. She said the higher tariffs will “primarily acts as a negative supply shock, raising prices and decreasing economic activity.”
Kugler said that, over time, there could be significant effects on productivity.
“As firms adjust to the higher input costs and lower demand, they may cut back on capital investment and shift to a less-efficient combination of inputs,” she said. “Additionally, less-efficient domestic firms may increase their market share. All of this may result in a decrease in potential output growth, lowering the underlying pace of economic activity in the U.S.”
The Fed governor also asserted that consumers, businesses, and market participants have reported high levels of uncertainty about which economic policies may be ultimately chosen and how long they will remain in place. She said those levels of uncertainty have reached historical highs in recent months.
“In times of heightened uncertainty, businesses may delay investment decisions, and consumers may increase precautionary savings and postpone discretionary purchases,” Kugler said. “Moreover, the economic research literature has documented that these decisions from businesses and consumers reverberate through the economy, pushing down aggregate demand.” She said lower demand for their services and products may cause firms to post fewer job openings and cut back on investments to expand capacity.
However, Kugler said inflationary expectations – which have reached higher near-term expectations, with consumers and businesses expecting higher inflation one year from now – may ebb over the long term.
“Most longer-run measures, including those from the Philadelphia Fed’s Survey of Professional Forecasters and the New York Fed’s Survey of Consumer Expectations, show either stability or much smaller increases in inflation expectations, which does provide some comfort to me,” she said. “Additionally, inflation compensation, which is based on yields from Treasury Inflation-Protected Securities, has increased only for short-term maturities, such as one year ahead, and has shown stability in maturities over the five years starting five years from now.
“Still, I have taken note of the increase in longer-term inflation expectations from the Michigan survey, which reached the highest level since June 1991.
“Given these developments, I am keeping a close watch on inflation, because as I have indicated in the past, I believe it is critical to keep long-term inflation expectations very well anchored at 2%,” she said.
Economic Outlook: Federal Reserve Board Gov. Adriana D. Kugler
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