Chicago Federal Reserve Bank President Goolsbee warned on Wednesday that trade conflicts between the United States and major trading partners could trigger long-term inflationary pressures and have a profound impact on the Federal Reserve's policy decisions, especially in 2025 and beyond.

“Supply-side disturbances can have a material impact on overall inflation,” Goolsbee said at the Chicago Fed’s auto industry insights seminar in Detroit. “They are not always small, insignificant blips that should not be ignored.”

Currently, the White House is threatening to impose tariffs of up to 60% on Chinese imports, 25% on imports from Mexico and Canada, and at least 10% on other countries around the world. If these tariff policies are implemented and other countries take retaliatory measures, the downward trend in US inflation since 2022 may be reversed.

Goolsbee stressed: "We have to consider anything that could push up prices. If we find that inflation is picking up or stagnating in 2025, the Fed will face a difficult choice and must figure out whether inflation is caused by an overheated economy or by tariffs. This distinction will determine whether and when the Fed will take action."

Goolsbee compared the inflation risks brought by the current tariffs with the 2018 Sino-US trade conflict and the supply chain disruptions during the COVID-19 pandemic. He pointed out that the trade conflicts during the first term of the Trump administration mainly affected some Chinese goods and did not lead to a significant increase in overall economic inflation. The surge in inflation after the COVID-19 pandemic was due to changes in global work patterns and large-scale fiscal stimulus, which led to limited labor supply and a surge in consumer demand, ultimately causing runaway inflation.

However, the current factors threatening the supply chain are far more than tariffs and trade conflicts. Goolsbee warned that natural and man-made disasters, such as fires, hurricanes, port collisions, canal blockages, dock worker strikes, etc., may become new supply chain crises. In addition, geopolitical conflicts and changes in immigration policies may also exacerbate pressure on the supply side.

He emphasized in particular: "One of the lessons learned from the COVID-19 pandemic is that supply chain issues cannot be ignored. The current threat of comprehensive and high tariffs may be more like the early days of the COVID-19 pandemic than the trade conflict in 2018."

Compared with 2018, companies may have more limited ability to respond. Goolsby pointed out that whether companies can mitigate the impact of tariffs by adjusting their supply chains depends on the substitutability of goods. If companies have successfully adjusted their supply chains to make them more resilient over the past five years, they may be able to avoid price increases caused by tariffs by shifting their production bases. But if companies have already moved the most easily relocated supply chains out of China in 2018, then the remaining parts may be the most difficult to replace goods, which will lead to more severe inflationary pressures.

In addition, the impact of tariffs may be broader. Nearly half of U.S. imports are parts and components, which means that even if the final product is made in the U.S., high import costs may still push up the final product price. For example, the automotive industry's supply chain spans across North America, and parts flow multiple times between different countries. If tariffs are imposed multiple times, the final product price may rise significantly.

Goolsbee pointed out that this round of tariffs may involve more countries, a wider range of goods, and even higher tax rates than in 2018. Therefore, the inflationary impact may be more significant and last longer. He said: "We have seen during the COVID-19 pandemic that the more complex the supply chain, the longer it takes to adjust and adapt."

Goolsbee has served as president of the Chicago Fed since 2023 and became a voting member of the Federal Open Market Committee (FOMC) this year. Previously, he taught and conducted economics research at the University of Chicago Booth School of Business.