Chicago Fed president discusses impacts of tariffs and interest rates in Iowa

Before President Donald Trump rolled out a slew of bigger-than-expected tariffs on April 2, things were looking up, said Chicago Federal Reserve Bank President Austan Goolsbee.

The U.S. economy was in a good place, characterized by stable, full employment and inflation nearing the Fed’s 2 percent target. The baseline economic conditions would typically warrant lower interest rates than those currently in place.

And while the U.S. economy looks good underneath the surface, uncertainty around the impact of Trump’s tariffs and trade policy has kicked up a “bunch of question marks in the air, you know, dust in the air that makes the visibility low” for the Fed to consider lowering short-term borrowing costs, Goolsbee said.

He noted the potential for tariffs to lead to “stagflation,” characterized by stagnant economic growth and rising inflation where employment drops and prices go up, which presents a challenge for how the U.S. central bank responds.

Once the dust clears on tariff policy, if the economy looks like it did before the Trump administration announced the slew tariffs, the short-term interest rates that the Fed controls can go “a fair bit below where they are today,” Goolsbee said.

He sits on the Federal Open Market Committee (FOMC) of the Federal Reserve Board responsible for setting the nation’s monetary policy, which influences interest rates and credit conditions impacting the economy.

Goolsbee spoke Tuesday in downtown Cedar Rapids at an event held by the Corridor Business Journal. He sat down with The Gazette before the event.

The following is a transcription of a portion of that conversation, edited for brevity and clarity.

Q: For those readers who are not familiar, what is the Federal Open Market Committee? Who sits on it? What does it do? What are its goals?

A: The FOMC sets monetary policy, which includes influencing interest rates and the availability of credit. It oversees open market operations, where the Federal Reserve buys and sells government securities to manage the money supply and influence interest rates. The FOMC’s decisions are aimed at achieving the Federal Reserve’s dual mandate of maximum employment and stable prices.

Its decisions about interest rates and the money supply can have a significant impact on the economy, affecting spending, investment and economic growth. Changes in the federal funds rate, which is set by the FOMC, can ripple through the economy, influencing other interest rates and financial conditions.

The FOMC is composed of 12 voting members — the seven members of the Board of Governors and five of the 12 Reserve Bank presidents. The Federal Reserve Bank of New York is a permanent member of the Committee. The presidents of the other Reserve Banks fill the remaining four voting positions on the FOMC on a rotating basis.

In addition, all the remaining seven Reserve Bank presidents attend FOMC meetings and participate in FOMC deliberations and contribute to the assessment of the economy and policy options.

It meets in Washington, D.C., approximately every six weeks.

“There are a lot of parts of the economy that are sensitive to the interest rate, and some of that are for everyday consumers — buying cars, buying durable goods and other big purchases tend to be sensitive to the interest rate,” Goolsbee said. “And there are a bunch of business activity that are sensitive to the interest rate too, like building out factories, big capital investments … construction and housing.”

When inflation is rising, the Fed often raises interest rates to slow down economic activity and curb price increases. During periods of strong economic growth, demand for credit tends to increase, which can push interest rates higher.

The Fed may raise interest rates as part of a “tightening cycle” to slow down the economy and combat inflation. When businesses and consumers are eager to borrow, the demand for credit increases, which can lead to higher interest rates.

“It’s kind of like a screwdriver type of a tool,” Goolsbee said. “And in a normal business cycle, if it feels like the economy’s overheating, you kind of tighten it. And if it feels like things are getting too chilled, they loosen it.”

Q: What are the economic conditions and data telling you now, and what is the likelihood that the U.S. central bank lowers interest rates?

A: “The dual mandate (of full employment and price stability) was looking pretty solid going into April. Unemployment was around 4 percent — looking like stable, full employment to me. Inflation, which had been way too high, was coming down to something close to the 2 percent target that the Fed lays out. … I thought rates would be coming down over the next year, year and a half.

“… So in my view, if we get back to a path that involves stable, full employment and inflation heading to our 2 percent target, that’s the time to commence moving rates to where we want them to settle as well. And then the economic conditions starting in April, just put a bunch of question marks in the air, you know, dust in the air that makes the visibility low. … And we just need to burn that fog away before I’m comfortable concluding that conditions remain the same kind of solid that they were in February and March.”

Q: In your mind, what needs to happen to get to that path?

A: “I’ve been here in Cedar Rapids, and (I) was over in the Quad Cities, meeting with a bunch of business leaders. And a number of them emphasized that they, too, are waiting to see what happens. They haven’t seen as big a direct impact from tariffs, for example, as they kind of had expected to. And so they’re trying to figure out, is it just a matter of time?“

Goolsbee said higher inflation from U.S. import tariffs could become evident quickly, but it will take longer to see a tariff-induced economic slowdown.

“So I think we just need, I just want to get a little more comfort on that, because the official data comes out with a lag of a month or a quarter.”

Q: What are business leaders telling you in terms of how tariffs and the President’s trade policies are impacting them? What are you seeing in terms of impact to the U.S. and Midwest economy?

A: “The Midwest has the most exposure to tariffs of all the regions of the country,” Goolsbee said. “Four of the top seven most affected states by tariffs are in the Chicago Feds district,” which includes Iowa, Wisconsin, Illinois, Indiana and Michigan.

And Iowa is among the top five states most impacted by tariffs. The state’s economy is largely driven by manufacturing and agriculture, “two sectors that are very dependent on the supply chain on the one side and export markets on the other,” Goolsbee said.

Iowa’s top agricultural exports, such as corn, soybeans and pork have been caught in the crosshairs of retaliatory tariffs, particularly from China, a major importer of U.S. agricultural products.

Farmers are experiencing falling prices for their crops and higher prices for inputs like fertilizer and imported materials.

At the same time manufacturing in Iowa and the wider Mid-American region has slowed, with businesses facing increased costs for imported inputs, leading to decreased profits and potentially higher consumer prices.

“There’s been a lot of concern among business leaders in Iowa … about what the impact could be. But I will also emphasize most of them are saying they haven’t seen that impact yet, and are expressing guarded optimism that maybe we could get through this period” of uncertainty over U.S. trade relationships, Goolsbee said.

Q: So as tariffs impact prices, what part of the current economy or current economic environment are you most worried about?

A: “The biggest concerns are anyone that’s dependent on the supply chain coming especially from Canada and Mexico, or where Canada and Mexico are their big markets that they’re selling to. So the agriculture economy was already having some farm income squeeze — the cost of production still rising and the sales prices kind of capped out. … I have the double worry that manufacturing is usually one of the most cyclical sectors of the economy. So in addition to trade restrictions affecting their costs of production, if there’s a general slowdown, that usually hits durable goods manufacturing especially first.”

Q: Just a quick follow up to that point, there have been large layoffs across the state in manufacturing and ag-related fields.

A: “That was kind of before the tariffs were coming in. So that just kind of to me, that heightens the area of concern that it was already a tough period for manufacturing that was oriented to the ag economy. And then if you add these higher costs of production on that, that could turn into something worse.”

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