The U.S. economy remains solid, but tariff-driven uncertainty is complicating the Federal Reserve’s efforts to balance price stability and maximum employment, Federal Reserve Governor Lisa D. Cook said Tuesday (June 3).
In a speech delivered at the Council on Foreign Relations in New York, Cook said that while unemployment remains low and inflation is somewhat above the goal of 2%, “there is evidence that changes to trade policy are starting to affect the economy” and increasing the likelihood of inflation rising and the labor market cooling.
“In this environment, monetary policy will need to carefully balance our dual-mandate goals of price stability and maximum employment,” Cook said.
Inflation has declined from the pandemic highs but was still at 2.1% for the 12 months ending in April and 2.5% when food and energy costs are excluded, Cook said, adding that changes in trade policy are causing price increases that may make it difficult to make further progress in the near-term.
“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,” Cook said.
The labor market has remained resilient, with April’s unemployment rate holding steady at the historically low level of 4.2%, Cook said. Payroll job gains moderated in the first four months of the year compared with the previous year.
“Trade policy changes could alter hiring plans in the near future,” Cook said.
Cook said she supported leaving the policy interest rate unchanged at the Fed’s policy meeting in May and that the current monetary policy can respond to a range of potential developments.
“Trade policy changes and the response of financial markets, firms and consumers suggest risks to both sides of our dual mandate,” Cook said. “As I consider the appropriate path of monetary policy, I will carefully consider how to balance our dual mandate, and I will take into account the fact that price stability is essential for achieving long periods of strong labor market conditions.”
The Federal Reserve reported in April that uncertainty tied to tariffs and trade wars was “pervasive” across the 12 central bank districts. While the economic activity measured in March was mixed, there was a palpable change in sentiment.
