A temporary reprieve in trade tensions between the United States and China has reduced, but not eliminated, the odds of a shock to the economy that carries a whiff of stagflation, a top official at the Federal Reserve warned on Monday.
Austan D. Goolsbee, president of the Federal Reserve Bank of Chicago, said that tariffs and the uncertainty around President Trump’s policies still risk a combination of higher consumer prices and slower growth.
Mr. Goolsbee welcomed the decision by the United States and China to lower tariffs on each other’s imported products for 90 days. But he said that the temporary nature of the deal and the extent of the levies still in place will weigh significantly on the economy.
“It is definitely less impactful stagflationarily than the path they were on,” Mr. Goolsbee, who is one of 12 Fed officials to vote on policy decisions this year, said in an interview. “Yet it’s three to five times higher than what it was before, so it is going to have a stagflationary impulse on the economy. It’s going to make growth slower and make prices rise.”
Under the agreement forged over the weekend, the United States reduced its tariff on Chinese imports to 30 percent from its current minimum 145 percent level, while China lowered its levy on American goods to 10 percent from 125 percent.
Taking into account these reductions, as well as the tariffs that remain in place with nearly all of America’s trading partners, economists estimate that consumers still face an effective tariff rate of around 15 percent.
The deal with China is the latest twist in what has been a tumultuous period for both the economy and global financial markets, as Mr. Trump has repeatedly changed which countries and products he wants to tariff and by how much. Before announcing the truce with China, the White House had also put in place a 90-day delay on so-called reciprocal tariffs that Mr. Trump had imposed on dozens of countries last month.
These policies, plus shifting plans related to forthcoming tax cuts and other central pillars of Mr. Trump’s agenda, have upended forecasts for the economy. Officials at the Fed have for weeks warned that tariffs will stoke higher inflation and slower growth. What is unclear is the magnitude of the shock, which will depend on which tariffs will actually stay in place and for how long, as well as how consumers and businesses respond.
Already, the uncertainty around these policies has started to have an impact. Surveys show that consumers have become increasingly downbeat about the economic outlook and businesses are essentially frozen in place until there is more clarity about what Mr. Trump has planned.
“The way that we’re doing this is not free for the economy,” said Mr. Goolsbee. Businesses he has spoken to want to make big investments and hire people but the prospects that any of these negotiated tariff truces could lapse have made decisions like that much more difficult.
As a result, the Fed is in a wait-and-see mode about whether and when it might restart interest rate cuts. The central bank paused reductions in January after reducing borrowing costs by a percentage point last year, arguing that a patient approach was prudent when it was not yet clear how much impact Mr. Trump’s actions would have on the economy.
Mr. Goolsbee again endorsed a waiting approach on Monday, pointing to the inherent uncertainty being stoked by the Trump administration.
“Their statements are coming with explicit recognition that this isn’t permanent and that it’s going to be revisited in the near future,” he said of the White House’s communications about tariffs. “Part of those announcements are explicitly putting off into the future major decisions, so that’s why it feels like there is in corporate America a lot of sitting on the hands. If they’re sitting on their hands, that backs into the wait-and-see posture of the Fed.”
Mr. Goolsbee said the Fed can afford to take its time before making any policy decisions. The labor market is still in solid shape and there are not yet acute signs of strain. But the risks to inflation are not negligible, and it is still possible that tariffs of the nature that Mr. Trump is willing to keep in place could lead to a much more persistent problem, he said.
“If we could get the dust out of the air, it would make sense to think that rates would be going down,” he said. “But the bar for action has to be high when there’s so much uncertainty.”
Mr. Goolsbee said what would concern him is if either the labor market started to deteriorate notably or if expectations about inflation over a longer time horizon started to rise significantly.
“Stagflation is a very uncomfortable situation for a central bank,” he said.