Federal Reserve Governor Lisa Cook delivered a pointed caution to policymakers and business leaders, warning that the growing application of tariffs on imports could curb U.S. productivity gains and ultimately exacerbate inflation—forcing the central bank to consider higher interest rates to preserve price stability. Speaking at the Hoover Institution’s annual economics conference at Stanford University, Cook underscored that the uncertainty surrounding trade policy, coupled with increased costs for imported inputs, poses a serious risk to capital investment, technological innovation and the broader economic outlook.

Cook opened her remarks by noting that recent shifts in trade measures, including elevated import duties on industrial and agricultural goods, have disrupted long-established supply chains. Firms that once relied on cost-effective foreign components now face higher prices and unpredictable policy timelines. “I expect to see a drag on productivity in the near term stemming from the recent changes to trade policy and the related uncertainty,” she declared, adding that businesses often delay investment decisions when faced with ambiguous regulatory environments.

The Federal Reserve governor explained that companies typically postpone or scale back capital expenditures when they cannot pinpoint the eventual magnitude or duration of tariff measures. Such hesitation can stall factory upgrades, machinery purchases and software deployments that drive productivity growth. Over time, a reduction in capital formation can slow the pace at which firms adopt cutting-edge technologies—eroding efficiency and dampening potential economic output.

Cook stressed that elevated input costs do more than just squeeze corporate profit margins; they can propagate through the economy. When manufacturers pay more for intermediate goods, these expenses frequently translate into higher prices for end consumers. This scenario tightens household budgets, weakens purchasing power and can prompt companies to raise wages to retain workers—further stoking inflationary trends.

Highlighting the broader implications for monetary policy, Cook noted that lower productivity growth directly reduces the economy’s potential output. In a more sluggish environment, the Federal Reserve has less “slack” to absorb demand pressures before prices begin to rise. “A reduction in potential gross domestic product means less slack in the economy which, in turn, means greater inflationary pressure,” she observed. As a result, monetary authorities may face pressure to increase policy rates to keep inflation anchored at their 2 percent target, even if economic growth and employment figures show signs of slowing.

Cook’s concerns echo those of several regional Fed presidents who have also cautioned that persistent tariffs could prolong elevated borrowing costs. At present, the Federal Open Market Committee has held its benchmark rate in a range roughly between 4.25 and 4.5 percent. Yet the specter of higher prices fueled by restricted trade channels may prompt policymakers to maintain or even tighten this stance longer than previously anticipated.

Industry leaders have already reported supply chain bottlenecks and rising input prices in sectors ranging from automotive manufacturing to food processing. For example, U.S. auto companies have cited tariff-induced steel and aluminum costs as a factor in higher vehicle prices. Meanwhile, agricultural exporters have pointed to retaliatory levies as a drag on farm income, reducing their capacity to invest in productivity-enhancing equipment and precision agriculture technologies.

Cook’s remarks come amid broader uncertainty over global trade relations. Negotiations with major trading partners remain in flux, and the prospect of expanded tariff lists has left businesses on edge. Economists warn that protracted trade disputes could shift economic activity away from growth-oriented initiatives toward defensive cost-management strategies.

Yet, amid these headwinds, Cook highlighted artificial intelligence (AI) as a potentially offsetting force. Advances in machine learning, robotic automation and data analytics hold the promise of significant efficiency gains. In sectors such as logistics, financial services and health care, AI applications already are streamlining processes and reducing labor costs. “AI has the potential to revolutionize numerous sectors of our economy,” Cook said, pointing to innovations in supply chain optimization, natural language processing and medical diagnostics.

Despite AI’s promise, Cook cautioned that the technology’s benefits might not fully neutralize the productivity challenges posed by increased trade barriers. Deploying AI systems requires substantial up-front investment in hardware, software and workforce training. Smaller firms, in particular, may struggle to secure the capital and talent needed to implement sophisticated AI solutions. Moreover, productivity gains from technology adoption often take time to materialize and can vary significantly across industries.

Financial market reactions to Cook’s speech were muted but attentive. Treasury yields experienced modest gains on the day, reflecting investor recognition that the Fed may need to keep rates higher for longer if inflation fails to ease. Equity markets, meanwhile, showed a slight rotation out of sectors most sensitive to interest rate increases, such as utilities and real estate, into areas more insulated from monetary tightening.

Within the Fed, Cook’s stance highlights a growing divide between officials focused on taming inflation and those who emphasize the risks to growth. While some policymakers have signaled openness to rate cuts if inflation moderates, Cook and others underscore that stubborn price pressures warrant a patient approach. She reiterated the dual mandate facing the Federal Reserve: achieving maximum sustainable employment while ensuring price stability. Tariff-driven disruptions, she argued, could strain that balance.

Cook also addressed potential spillovers to labor markets. Reduced investment and slower productivity growth can limit wage gains over time. Workers might face a scenario of rising prices but stagnant real incomes—a dynamic that could dent consumer confidence and spending. Such an environment complicates the Fed’s efforts to support a robust labor market without inflaming inflation.

Looking ahead, Cook indicated that the Fed will closely monitor incoming data on manufacturing output, business investment and trade flows. She highlighted reports indicating that business sentiment has softened in recent months, with firms citing policy uncertainty as a key factor. Should these trends persist, the Fed may need to calibrate its policy path to account for weaker underlying momentum in productivity and growth.

Cook concluded her address by urging clearer trade policy signals to reduce uncertainty. “Transparent, stable, and well-communicated trade measures would help businesses plan and invest with greater confidence,” she asserted. Such clarity, she argued, would support both productivity expansion and price discipline—thereby easing the burden on monetary policy.

As debate continues over the optimal course for U.S. trade and monetary policy, Cook’s warning underscores the intricate interplay between global commerce, technological innovation and central-bank decision making. With tariffs reshaping cost structures and investment incentives, the coming months may test the resilience of America’s productivity engine—and the Federal Reserve’s capacity to navigate inflation without derailing growth.

(Adapted from Reuters.com)

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