Federal Reserve Governor Michael Barr today warned that higher tariffs are likely to put upward pressure on inflation and lead to higher unemployment.
Barr spelled out his concerns during a speech at an economic conference in Iceland, in which he said that the otherwise strong economic outlook for the U.S. “has been clouded by trade policies that have led to an increase in uncertainty, contributing to declines in measures of consumer and business sentiment.”
“In my view, higher tariffs could lead to disruption to global supply chains and create persistent upward pressure on inflation,” Barr said. “Faced with substantial tariffs, businesses will likely change how they source intermediate inputs, and it will take time and investment for them to reroute their distribution networks. Conversely, global trade networks may change rapidly, and some suppliers may not be able to adapt quickly enough to survive these changes. This concern is particularly acute for small businesses, which are less diversified, less able to access credit, and hence more vulnerable to adverse shocks.”
Barr said he was equally concerned that tariffs would lead to higher unemployment as the economy slows. That would put the Federal Open Market Committee “in a difficult position if we were to see both rising inflation and rising unemployment.”
“The size and scope of the recent tariff increases are without modern precedent, we don’t know their final form, and it is too soon to know how they will affect the economy,” Barr said. “Yet given the economy’s strong starting point and the progress we have made in bringing inflation back toward our 2% objective, monetary policy is in a good position to adjust as conditions unfold.”
