NEW YORK — At least one Federal Reserve official expects tariffs to lead to higher inflation, and she is worried the effects could be long lasting.
Speaking before the Economic Club of New York on Thursday, Fed Gov. Adriana Kugler said she sees ways in which higher
"I don't think it is as clear that one can look past
In prepared remarks, Kugler described three channels through which price growth could become permanent: rising consumer expectations, lower productivity from businesses and opportunistic price hikes, the last of which she said she has already seen anecdotal evidence.
Kugler's views clash with other members of the Federal Open Market Committee, who have expressed confidence that increases in prices will be minimal and happen just once. Fed Gov. Christopher Waller has been the leading voice in support of this transitory projection. He has said firms would be reluctant to pass along price increases at the risk of losing market share.
Data is just beginning to trickle in from the first full month of increased tariffs, but Kugler said she is already seeing signs of economic constraint as a result of the trade policies. She pointed to heightened input costs and core goods prices, a rise in layoff signals and gloomy consumer sentiment survey results as signs that new policies and proposals are shaping economic activity. Many of the tariffs introduced in April were struck down by the U.S. Court of International Trade last month. An appeals court put a stay on that decision last week, allowing the levies to remain in place while the case is litigated.
Yet, despite these headwinds, Kugler pushed back against the idea that the Fed should be lowering its policy interest rates preemptively, something President Donald Trump has repeatedly urged the central bank to do. She said because inflation will be the "first order" impact of the tariffs, the Fed should not make policy changes that risk inducing greater demand.
"My primary focus right now, at this juncture, is inflation," she said. "I think once tariffs are implemented fully we can then start talking about a greater slowdown, because those increases in prices will call for a reduction in demand. But that hasn't happened yet, so it doesn't make sense for us to do something."
Kugler said the economy remains on sound footing overall, based on the core government datasets the Fed tracks closest. Despite the uncertainties created by tariffs, she said economic activity has continued to expand, the labor market has been resilient and inflation is still trending toward the Fed's 2% target.
Yet, she noted, these datasets all operate with significant lags, providing little insight into where the economy is today and even less about where things might be heading.
"If policymakers solely rely on these traditional data to forecast what the economy will do in the future, they end up focusing on the past, which is a little like driving down the road by looking in a rearview mirror," she said.
Instead, Kugler said she has paid closer attention to private reports such as the Institute for Supply Management's Purchaser Management Index — which tracks input and supply costs — and reports from the firm Challenger, Gray & Christmas, which provides placement services for workers who have been laid off. She said she also tracks weekly job openings data and layoff announcements from large employers.
Kugler said these sources provide her a more real-time snapshot of economic trends, even if they are a bit noisier than monthly and quarterly reports from the Bureau of Labor Statistics and the Bureau of Economic Analysis. However, she said she gives less credence to the ADP Employment Report — which Trump has favored in recent months — because it consistently falls short of government-tracked data.
"Since '22 or so, it has been coming down below the numbers that we get from the Department of Labor, from BLS, and so I'm not particularly concerned about that number, and it's very erratic, so we have to take it with a grain of salt," she said. "But we should see … if those changes are more permanent, if it's not just a one-time thing."
Kugler also defended the consumer sentiment surveys from the University of Michigan, which have shown inflation expectations ramping up in recent months, not just for the remainder of this year and next, but also several years into the future. While frequently relied upon in the past, the survey has come under question as of late both because of methodological changes — shifting from in-person surveys to online — and because its figures differ significantly from other measures.
"While I take seriously the concern that recent methodological changes in the survey may have made this measure less reliable, this survey is a long-standing and important barometer of consumer sentiment, and I still monitor the signals it is giving us closely," Kugler said in her speech, noting that respondents to the Michigan survey expect inflation to average 6.6% over the next year and 4.2% over the next five to 10 years.
Waller has been especially critical of survey-based inflation expectations in recent months. He has argued instead for tracking market-based indicators, such as hedging activity, which indicates an expected inflation rate of roughly 3% in the year ahead with longer-term activity signaling expectations anchored closer to 2%.
Kugler also said that other policy changes underway in Washington deserve close attention from the Fed as it attempts to
She also said the budget bill being considered in Congress contains some elements that could stimulate economic activity and other components that could constrain it. On net, she said, the spending package is likely to induce more aggregate demand, which will have to be factored into the Fed's decision-making.
"It's one more force that could push us towards an increase in prices, which is why I say I'd like to consider all policies," she said. "Obviously, tariffs are the big, key thing that everyone is discussing right now, but there are other things happening, and we need to take advantage of that as well as we develop our monetary policy plan."
