Adriana Kugler, a governor of the Federal Reserve, emphasized that her main concern currently is inflation rather than the potential slowdown of economic growth. Speaking at the Q&A session of the New York Economic Club on Thursday, Kugler highlighted that the impact of tariffs on prices is a “first – order effect” and exerts upward pressure on inflation.
Inflation Expectations and Tariffs
Kugler noted that as prices rise, consumers and businesses will respond, leading to a decline in demand and potentially a more significant slowdown in economic activity and employment. She stated that the majority of Federal Reserve policymakers are primarily concerned about inflation, with the potential economic slowdown being a secondary concern.
In a prepared speech, Kugler mentioned that tariffs could lead to a more significant increase in prices. She supports maintaining stable interest rates if upside risks to inflation persist, citing research by Federal Reserve staff that indicates tariffs may be passed on to prices relatively quickly. She expects tariffs to continue pushing up inflation in 2025, with current inflation facing greater upside risks while future employment and output growth face potential downside risks.
Channels Through Which Tariffs Affect Inflation
Kugler outlined three channels through which tariffs might continue to affect inflation:
Rise in Short – Term Inflation Expectations: Increased short – term inflation expectations among Americans may give enterprises more room to raise prices.
Price Hikes for Non – Tariff – Affected Goods: Enterprises may take the opportunity to raise the prices of goods that are not directly affected by tariffs.
Decline in Productivity: As companies cut investment and shift to less efficient operations to cope with rising costs and weakening demand, the decline in productivity could exert upward pressure on prices.
Conclusion
Adriana Kugler’s remarks underscore the Federal Reserve’s current focus on managing inflation amid the uncertainties posed by tariff policies. While acknowledging the potential for economic slowdown, Kugler emphasizes the immediate need to address inflationary pressures. The three identified channels through which tariffs affect inflation highlight the complexity of the situation and the importance of maintaining stable interest rates to mitigate these risks.
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