Fed’s Goolsbee Urges Patience As Trump’s Tariffs Stir Fears Of Stagflation: ‘We Need To Be Careful When You Say Transitory’

Zinger Key Points

• Tariffs may be transitory, but retaliation and scope could make inflation harder to ignore, according to Chicago Fed’s Goolsbee.
• Business sentiment is weakening, with firms delaying investment amid rising economic uncertainty.

Chicago Fed President Austan Goolsbee suggested that the central bank needs to be a steady hand and avoid overreacting, as rising trade tensions, shaky business confidence and stubborn inflation complicate the outlook for interest rates.

In an interview with CNBC Friday, Goolsbee indicated that the Federal Reserve must take a long-term approach as the U.S. economy absorbs the potential impact of new tariffs pushed by the Trump administration.

“There is nothing more uncomfortable than a stagflationary environment,” Goolsbee said. “There is no generic answer to it.”

Tariffs Could Be ‘Transitory’ — Or Maybe Not

Asked how the Fed should respond to trade-driven inflation, Goolsbee said it’s too early to draw firm conclusions. The key, he said, lies in understanding how long the tariffs stay in place, whether other countries retaliate, and how much of the cost hits U.S. consumers.

“We need to be careful when you say transitory,” Goolsbee said.

“The answer to what ‘transitory’ means this time around is whether the tariffs apply to intermediate goods, stoke retaliation, and other factors.”

His comment came just two days after Fed Chair Jerome Powell, speaking Wednesday after the Federal Open Market Committee held interest rates steady at 4.25%-4.50%, described tariff-driven inflation as potentially “transitory”—a word that drew scrutiny after the Fed’s 2022 miscalculation, when it wrongly assumed early inflation spikes would quickly fade.

Goolsbee noted that imports make up only 11% of U.S. GDP, and that one-time tariffs, if not met with retaliation, are “more likely to be transitory.”

Still, he warned that the larger the tariffs, and the more they resemble supply shocks, “the harder it will be for the Fed to look through them.”

Business Investment Is Stalling

On the ground, Goolsbee said the Fed is already seeing shifts in behavior from companies.

“There has been a decided turn towards anxiety and waiting on capital spending among business contacts,” he said, describing a growing trend of hesitation as uncertainty clouds the outlook.

“Markets want information fast but that is not realistic at this moment,” he added. “The Fed needs to be a steady hand and take the long view on the economy.”

He also said that while current conditions may be a shock, it depends on how long they last, underscoring the need for patience. “When you have a lot of uncertainty, you have to wait for things to clear up.”

Room For Cautious Optimism Persists

Goolsbee maintained a cautiously optimistic view. “There is still a lot of strength in the economy right now,” he said, noting progress on both inflation and employment.

“Unemployment and inflation do reflect progress towards the dual mandate.”

He believes that if the economy continues to cool gradually and inflation trends lower, interest rates could follow.

“I still believe the economy is resilient, and if there is progress on inflation, rates will be lower in 12 to 18 months.”

Yet, the path forward is far from guaranteed. Goolsbee indicated that if market expectations for long-run inflation begin to rise, or if inflation pushes beyond the initial impact of tariffs, “the Fed would have to revise the outlook.”

Market Reactions

Treasury yields fell in early Friday trading, with the 10-year benchmark yield hitting 4.21%. Long-dated Treasury bonds are up 1.2% for the week.

The dollar slightly gained, while gold prices dipped 0.3%.

Equity futures slumped, with S&P 500 contracts falling 1.2%.

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Originally Posted March 21, 2025 – Fed’s Goolsbee Urges Patience As Trump’s Tariffs Stir Fears Of Stagflation: ‘We Need To Be Careful When You Say Transitory’