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Investing.com -- Austen Goolsbee, President of the Chicago Federal Reserve, spoke on Wednesday at the 31st annual automotive insights symposium at the bank’s Detroit branch. Goolsbee’s speech focused on the economy’s supply side, particularly the impact of supply chain disruptions and new tariffs on inflation.
Goolsbee highlighted the lack of attention economists paid to supply chains until the disruptions caused by the Covid-19 pandemic in 2020. He mentioned that the lessons learned during the pandemic could influence monetary policy decisions in the future. Goolsbee also discussed the unusual economic patterns of the past five years, including the rise in inflation despite high unemployment rates in 2021 and the unexpected drop in inflation in 2023.
Drawing from the past, Goolsbee emphasized the substantial role of supply chain disruptions in driving inflation over the last five years. He compared the current scenario to the 2008 financial crisis, when economists and central banks had to quickly incorporate financial stability concerns into their economic considerations.
Goolsbee shared three lessons from the Covid-19 pandemic: supply chains are more specialized and fragile than expected, supply-side problems can spill over into other markets and take longer to resolve, and supply-side disruptions can materially impact aggregate inflation.
Addressing the current state of supply and its implications for 2025, Goolsbee noted that while the economy is strong and supply chains seem mostly healed, new challenges to the supply chain are arising. These include natural disasters, geopolitical disruptions, immigration issues, and the threat of large tariffs and potential trade wars.
Goolsbee cautioned against assuming away supply chain issues when considering the impact of tariffs on inflation. He reminded listeners that the complexity of the supply chain can prolong the management of shocks. He also pointed out that almost half of U.S. imports are intermediate goods, meaning that tariffs on these goods can raise the production costs for domestic manufacturers of other goods.
The Fed’s task in 2025, according to Goolsbee, will be to distinguish whether rising inflation is due to economic overheating or tariffs, a critical distinction for deciding when or if the Fed should act. He called for economic experts to work alongside business and industry contacts to understand the dynamics of these challenges.
Goolsbee concluded by praising the Chicago Fed’s Research Department for its expertise in industrial organization and productivity, and emphasized the importance of industry collaboration in understanding the supply side realities of the coming year.
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