The Fed’s New York chief said new U.S. tariffs on China, Mexico and Canada are likely to lead to higher inflation if they stay in place long enough, but that the central bank will need more data to forecast the impact.
“Tariffs on consumer goods do feed into core prices, do filter into prices that consumers pay,” John C. Williams told the Bloomberg Invest conference in New York, a live-streamed event. Based on what the central bank knows today, it does anticipate some effects on prices later this year.
In the past, “we’ve seen a pretty high pass-through of tariffs” by businesses to customers, the Fed branch president said, adding, however, that businesses will initially want more information before making major decisions.
And while there was only a short-term boost to price gains during the 2018-2019 trade war, the situation was different then — there’d been a decade of almost no inflation, Williams said. Businesses feel they’ve since regained pricing power.
The effect of tariffs depends on yet-unknown factors including how long they’re in place and which other countries they’re applied to, Williams said. The Fed will be watching how changes in trade policy affect business, consumer confidence and employment growth, he added.
“The tariffs are clearly influencing how people are thinking about inflation this year,” Williams said. “Clearly people are experiencing some higher prices.”
Regardless of what happens going forward, the U.S. economy and Fed policy are starting from a good place, with unemployment at about 4% and inflation gradually headed down toward the central bank’s 2% target, Williams said. That gives the Fed the flexibility to address uncertainty.
“The U.S. economy is amazingly dynamic, so you’re always operating in a changing environment,” Williams said. “In my 30 years at the Fed, I’ve been through many cycles.”
Williams defended central-bank independence, saying that global evidence shows that this produces better outcomes.