A top Fed official still sees a big economic hit coming from tariffs despite US-China talks

• Fed Governor Adriana Kugler warned of tariff consequences even as US-China tensions ebbed.
• Investors should still brace for higher inflation and slower growth, she said.

Markets are celebrating the rollback of US tariffs on China, but at least one Federal Reserve official still sees economic pain coming from the trade war.

In a speech on Monday, Fed Gov. Adriana Kugler said that the country won't escape a negative supply shock, given that current tariff rates are ultimately still much higher than they have been in recent decades.

"Trade policies are evolving and are likely to continue shifting, even as recently as this morning," she said Monday, referring to a US-Chinese agreement to temporarily dial down their tit-for-tat tariffs.

"Still, they appear likely to generate significant economic effects even if tariffs stay close to the currently announced levels, and the uncertainty associated with these tariffs has already generated effects on the economy through front-loading, sentiment, and expectations."

The effects Kugler foresees include sticky inflation and lower productivity, the essential ingredients for stagflation.

Kugler cited a Dallas Fed survey that found 55% of executives plan to pass on tariff-related price increases. Inflation will eventually wear on real income, operating costs, productivity, and economic certainty. All told, she expects economic growth to come short of last year's 2.5% expansion.

While her take isn't necessarily fresh, it stands out against the rapid optimism that took over markets on Monday. The sudden tariff truce between Washington and Beijing slashed recession outlooks among betting markets, supported by particularly upbeat commentary from Wall Street.

To be sure, others also emphasized that tariffs remain a risk.

"That will still be a drag, when we all know what tariffs do. As Chairman Powell said, they raise prices, reduce consumption, raise inflation," Evercore founder Roger Altman said Monday.

Echoing Kugler's point, analysts at Goldman Sachs said that though the US-China trade talks lowered tariffs from triple digits, this implies no more than a 2 percentage point decrease in the US' current effective tariff rate.