News

By Howard Schneider

WASHINGTON (Reuters) -Rising tariffs in the U.S. could feed into more prolonged inflation than might be expected, Fed Governor Adriana Kugler said on Wednesday, pushing back on views that prices would only rise on imported goods.

"There may be reasons why tariffs have more prolonged effects" than simply causing a one-time jump in the price of imported goods, Kugler said.

New tariffs already imposed by President Donald Trump, for example, target intermediate goods like aluminum and steel.

"This will affect all sectors through supply chain networks...It may take longer for that to filter through the economy," Kugler said at an event at Princeton University.

The risk of retaliation by other countries and the possible shift in U.S. inflation expectations could add to the impact, she said, as could the risk that tariffs distort prices so much it shifts capital towards the production of goods "in which maybe we don't have a comparative advantage."

"That will mean we're paying higher prices for things that could have been produced more cheaply somewhere else," Kugler said.

Kugler spoke as Trump was rolling out a sweeping set of new levies across much of the world, with new taxes as high as 46% on some countries, historic allies like the European Union hit with 20% levies, and 25% tariffs now slated to go into effect on Mexico and Canada.

Trump's actions have raised concern among some Fed officials that coming months could see growth slow even as prices rise, a difficult dilemma for a central bank charged with keeping prices stable and employment high.

"We are already seeing some upside risks to inflation...We may be seeing down the road a little bit of a slowdown as well," Kugler said.

Right now she said she felt higher-than-anticipated inflation was the bigger risk, particularly given that consumers seemed to be frontrunning tariffs with auto purchases, for example, that may add to growth in the near term.

She said in remarks prepared for the event that she supported keeping the Fed's current interest rate steady "for as long as these upside risks to inflation continue," given ongoing economic growth and stable employment.

The Fed held interest rates steady at its March 18-19 meeting, and central bank officials have said they want more clarity on the impact of President Donald Trump's policies. Fed policymakers' projections for the year, however, showed they expect higher inflation and slower growth than they did in December before the sweep of Trump's tariff plans became clearer.