Fed's Kugler says tariffs could trigger longer-term inflation

Federal Reserve Governor Adrienne Kugler said on Wednesday that higher U.S. tariffs could cause inflation for longer than expected, refuting the view that only prices of imported goods would rise.

"The long-term impact of tariffs may be due to more than just a one-time increase in the price of imported goods," Kugler said.

For example, the new tariffs already imposed by President Donald Trump target intermediate products such as aluminum and steel.

“This is going to impact all industries through the web of supply chains ... It may take longer to permeate the economy,” Kugler said at the Princeton University event.

She said the risk of retaliatory measures from other countries and a possible shift in U.S. inflation expectations could exacerbate the impact; in addition, tariffs could seriously distort prices and cause capital to shift toward the production of goods "where we may not have a comparative advantage."

"It means we're paying more for products that could be made cheaper elsewhere," Kugler said.

Kugler's speech comes as Trump is rolling out a raft of new taxes across much of the world, with some countries seeing new rates as high as 46 percent, historical allies like the European Union set to be hit with 20 percent tariffs, and Mexico and Canada set to be hit with 25 percent tariffs.

Trump's move raised concerns among some Fed officials that economic growth could slow in coming months despite rising prices, a difficult dilemma for a central bank tasked with keeping prices stable and employment high.

"We've seen some upside risks to inflation ... we may also see a slight moderation in inflation going forward," Kugler said.

She said she now sees higher-than-expected inflation as the bigger risk, especially since consumers appear to be getting ahead of tariffs by buying cars, for example, which could boost growth in the short term.

In remarks prepared for the event, she said that given continued economic growth and stable employment, she supports keeping the Fed's current interest rate unchanged "as long as upside risks to inflation persist."

The Federal Reserve kept interest rates unchanged at its March 18-19 meeting, with central bank officials saying they wanted to gain more clarity on the impact of President Trump's policies. Still, Fed policymakers’ projections for this year show they expect inflation to rise and economic growth to slow, compared with their December forecasts before the scope of Trump’s tariff plans became clear.