US Fed's Goolsbee: If trade returns to pre-tariff status, there will be downside room for interest rates

Austan Goolsbee, President of the Federal Reserve Bank of Chicago, recently stated that if a resolution to trade policies can steer the US economy back onto its pre-tariff trajectory, it would create conditions for officials to lower the central bank's interest rates.

Speaking at the Mackinac Policy Conference on Thursday (May 29) local time, Goolsbee said, "If we ultimately avoid tariff hikes or reach agreements that allow us to sidestep them, we could return to the state we were in before April 2."

Goolsbee added, "If stable full employment is achieved and inflation pulls back to the target level, interest rates can be lowered to their eventual appropriate position."

The "April 2" Goolsbee mentioned refers to the date when Trump signed an executive order on the so-called "reciprocal tariff." Trump referred to that day as America's "Emancipation Day," announcing a 10% "minimum baseline tariff" on trading partners and higher tariffs on certain others.

However, a week after "Emancipation Day," Trump abruptly changed his stance, announcing a 90-day suspension of the "reciprocal tariff" for most countries, though the 10% "minimum baseline tariff" remained in effect.

This week, there have been further developments regarding the "reciprocal tariff." On Wednesday (May 28), the US Court of International Trade in New York ruled Trump's package of tariff policies illegal, ordering the revocation of tariff measures implemented under the International Emergency Economic Powers Act.

The Trump administration has appealed the ruling, meaning the fate of the tariffs may ultimately be decided by the appellate court or even the Supreme Court.

In response, Goolsbee commented, "If we can clear the fog, I still believe the US economy's underlying fundamentals are strongly supported by the 'dual mandate' (i.e., full employment and price stability)."

However, he also added, "The longer the discussions drag on and the more changes are involved, such as some of the current policy proposals, the more likely it is that the support from economic fundamentals will be overlooked."

In multiple interest rate decisions this year, the US Fed has maintained interest rates unchanged, waiting for uncertainties surrounding tariffs and other policies to be resolved. Policymakers believe the US economy remains robust, allowing them to adopt a wait-and-see approach.

At the same time, policymakers have also pointed out that the final scope of tariffs and their specific impact on the economy remain unclear. Goolsbee said last week, "Before the situation becomes clearer, the threshold for taking any action has become higher."

In his latest remarks, Goolsbee noted that the US currently faces a situation of rising prices and a cooling job market, but he emphasized that this does not equate to the "stagflation" of the 1970s, characterized by high unemployment and high inflation.

Goolsbee believes that the current situation is merely a "direction of stagflation," meaning "inflation is rising while employment conditions are deteriorating."