WRAPUP 2-Fed officials see inflation risks from tariff surge

Updates to reflect Trump tariff suspension on Canada

By Michael S. Derby and Howard Schneider

Feb 3 (Reuters) - The Trump administration's plan for trade tariffs come with inflation risks, two Federal Reserve officials warned on Monday, stopping short of saying how that affects their thinking on monetary policy in a climate of uncertainty.

"The kind of broad-based tariffs that were announced over the weekend, one would expect to have an impact on prices," Federal Reserve Bank of Boston President Collins said in an interview with CNBC, adding that "with broad-based tariffs, you actually would not only see increases in prices of final goods, but also a number of intermediate goods."

Collins, however, noted that there's not a lot of experience on how mega tariffs impact the economy in the modern age, which makes it hard for the Fed to know exactly how things will play out. She noted it is possible that the Fed could even shrug off a one time increase in inflation tied to the tariffs, although even that was uncertain.

Speaking separately, Atlanta Fed President Raphael Bostic warned his business contacts were planning to pass through any rising costs related to the tariffs.

"The ultimate question about whether that is significantly inflationary depends on exactly how it plays out," as there are scenarios where the Fed may be able to shrug off these increases and ones where it might not be able to. "To the extent that were to impact things like inflation expectations then you'd have to," Bostic told reporters after a speech.

Trump on Saturday slapped tariffs on the three largest U.S. trade partners, announcing a 25% duty on goods from Mexico and Canada and an additional 10% duty on imports from China. Canada retaliated with its own tariffs on a range of U.S. products.

On Monday, Trump said he was suspending the tariffs on Mexico for a month after President Claudia Sheinbaum agreed to send soldiers to the U.S.-Mexican border to curb drug trafficking. Later that same day, Trump also granted Canada at least a 30-day reprieve after that nation agreed to create a special czar to target the smuggling of fentanyl while ensuring permanent monitoring of the shared border.

In the fluid situation, economists noted that broadly speaking, the tariffs Trump has been pursuing will push up inflation and depress growth.

Analysts at the Peterson Institute for International Economics said Monday that the full suite of tariffs on the three nations, if implemented, will cost the typical American household an additional $1,200 a year in higher costs.

Meanwhile, ING chief international economist James Knightley highlighted the uneven nature of who will bear the impact of tariffs, which are effectively tax increases on American citizens, as tariffs are paid by the citizens of importing nations.

"Much of the cost increase caused by tariffs will be passed onto U.S. consumers," Knightley said, adding "the burden will fall disproportionately on low-income households who spend more of their income on physical goods relative to higher income households."

'NO URGENCY'

The Federal Reserve, which cut interest rates by a full percentage point last year, held its policy rate steady last week, flagging uncertainty in the economic outlook. Fed Chair Jerome Powell said after the meeting that when it comes to tariffs, "we need to let those policies be articulated before we can even begin to make a plausible assessment of what their implications for the economy will be."

Collins, who is a voting member of the Fed's rate-setting committee this year, told CNBC that Fed policy is well-positioned to deal with what lies ahead for the economy. She noted that "it's really appropriate for policy to be patient, careful, and there's no urgency for making additional adjustments, especially given all of the uncertainty, even though, of course, we're still somewhat restrictive" with the current stance of interest rates.

Bostic also signaled he was ready to move to the sidelines for the time being. There is "a ton of uncertainty in a ton of space," Bostic told a Rotary Club of Atlanta meeting, adding "there are a lot of things I am going to wait and see about ... I'd be very satisfied to wait for a while" with rates at their current levels.

Collins left the door open to further rate cuts, saying "I certainly would see additional ... normalization, in terms of what the policy stance is," without providing a time frame.

Even before the tariff announcement Wall Street had been reckoning it would be some time before the Fed found the space to cut rates again. Trump's tariffs, if implemented, may close the door to any further easing, although for now financial markets are still priced for some modest easing.

In her television interview, Collins said the ultimate policy response by the Fed to the impact of the tariffs is unclear, though she noted it might be possible for central bank officials to not react at all.

A permanent tariff would likely "cause a rise in a price level," Collins said. "That's a short-term impact on inflation. Unless there are additional impacts that, if expectations remained well-anchored, you'd expect the Federal Reserve would try to look through" and leave monetary policy unchanged.

(Reporting by Michael S. Derby and Howard Schneider; Editing by Paul Simao, Nick Zieminski and Deepa Babington)

((Michael.Derby@thomsonreuters.com;))