Federal Reserve Bank of Boston President Susan Collins Cook has expressed concerns regarding the potential impact of current trade policies on the U.S. economy. In her most recent testimony, Cook pointed out that the data shows that trade policy is just starting to have a strong impact on worsening economic conditions. She predicts that GDP growth will slow for the rest of this year, which leads one to wonder what that would mean for inflation and labor demand.
Cook’s comments are particularly timely given the current debate over tariffs and their overall impact on our economy. She argued that if tariffs are imposed they will reintroduce an environment of stagflation. We live in an unusual time marked by a “no growth, high inflation” dynamic. Many economists agree with this alarmism. They worry that higher inflation and lower growth may soon start to weigh on consumers’ purchasing power, which would then likely depress business investment.
During an economic roundtable last month, Cook pointed to the bond markets’ remarkable strength in April. They barely survived all the stresses that month, though. This resilience gives us hope that despite the confidence of market participants being rattled, they are not fully losing faith in the fundamentals that drive our economy. If true, Cook’s predictions of slower growth usher in a more important line of inquiry concerning the sustainability of such resilience in the future.
The debate over trade policy becomes even more important as it dovetails perfectly with the new economic reality. Cook said that the recent tariff actions could be particularly damaging by upending existing supply chains. This turmoil would only drive up prices for Americans, both consumers and companies alike. Together, these factors would increase inflationary pressures during a period where the economy is already facing multiple headwinds.
In her analysis, Cook stressed that policymakers need to be cognizant of the long-term impacts that trade decisions have. She called for a more nuanced approach that benefits American manufacturing without hobbling economic development. The long-term impacts of such policies are especially critical as the country faces an economic recovery coming out of the pandemic.
Meanwhile, economic indicators are beginning to flash warning signs of a slowdown. Cook’s warnings should send chills down the spines of anyone following the interconnectedness of trade policy and economic performance. Perhaps most importantly, the Federal Reserve faces a daunting set of circumstances. This has an important implication for the monetary policy tradeoff between inflation and growth, making their joint management more difficult.
So as you can imagine, most economists are avidly watching these developments, trade policy advance. Together, they forecast that a further increase in tariffs would lead to even greater uncertainty for businesses. This will have spillover effects on those oriented to both domestic and international markets. In light of all these challenges, companies could begin to re-evaluate their investment priorities. That in turn could have a cascading effect that slows down the whole economy.
Cook’s obsession with stagflation is cause for concern. Above all, it raises crucial questions about whether our existing monetary policy instruments really can help us face down the dual threats of inflation and stagnation. When businesses start paying more for their operations because of tariffs, you can almost certainly expect businesses to pass these costs through to consumers, adding to inflation. This situation adds a layer of complexity to the Federal Reserve’s mission of ensuring stable economic conditions.