US tariffs may hamper efforts to cool inflation

Shifts in US trade policy could hold back further progress in lowering inflation, a senior US central bank official said Tuesday, as President Donald Trump's sweeping tariffs ripple through the economy.

The US economy is "still on a firm footing, but uncertainty has notably increased since the beginning of the year," Federal Reserve Governor Lisa Cook told a Council on Foreign Relations event in New York.

While the ultimate level of Trump's tariffs remains unknown as policy changes are ongoing, "the effects are already noticeable," she said. In particular, Cook warned of higher inflation and a jobs market cooldown.

Price increases tied to policy shifts, in turn, "may make it difficult to achieve further progress in the near term" when it comes to inflation, she added.

Typically, the Fed holds interest rates at a higher level if inflation is elevated and when inflation is low, the central bank can cut rates to boost economic activity.

For now, the Fed's preferred gauge of inflation -- the personal consumption expenditures price index -- rose 2.1 percent from a year ago in April.

This was down from a month prior, but slightly above the central bank's longer-run two percent target.

In a separate address in Iowa, Chicago Fed president Austan Goolsbee cautioned that encouraging inflation figures were "old news," saying they were the last reports before the effects of Trump's tariffs.

"Are the tariffs going to have a small impact?" he said. "We gotta wait and see what happens."

Cook added that "the economic environment could become highly challenging for monetary policymakers."

Besides changes to economic policy, the response of financial markets, businesses and consumers suggest risks to both price stability and unemployment, she noted.

"The recent post-pandemic experience with high inflation could make firms more willing to raise prices and consumers more likely to expect high inflation to persist," she said.