BUZZ-COMMENT-Tariff impact on inflation may trump growth risk for Fed

Feb 6 (Reuters) - Federal Reserve official Austan Goolsbee offered some interesting comments on Wednesday, warning about the potential inflationary impact of tariffs.

This is notable given that Goolsbee is among the more dovish members on the committee. Therefore, this provides an insight into what the consensus view and the reaction function from the Fed are likely to be on tariffs.

Recall that during the 2018-19 trade war, the Fed were more concerned over the implications for growth than inflation, where tariffs were viewed as one-time price shocks.

Consequently, the market reaction lent itself to a dovish one, where bonds rose as markets priced in a greater degree of policy easing to stem the potential drag on growth.

However, and as Goolsbee emphasised, the post-Covid world shows that supply chain disruptions can have a material impact on inflation.

We are in a much more inflationary environment compared with 2018-19. Firms now have more ability to pass on costs to consumers, who are more familiar with paying higher prices.

At the same time, tariffs risk being broader and higher than in 2018, which could see a larger and longer lasting impact on inflation.

As we saw initially from the fallout of the 25% tariff threats on Canada and Mexico, U.S. bonds did not rally on the announcement, with the benchmark 10-year yield continuing to hold support at 4.5%. At the same time, Fed easing bets were also slightly unwound, suggesting that the inflationary impact may trump the growth concerns this time around and thus keep the Fed on hold for longer.

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