By Howard Schneider
PALO ALTO (Reuters) -President Donald Trump’s unfolding trade policy may curb U.S. productivity and possibly require higher interest rates to contain inflation in a less efficient economy, Federal Reserve governor Lisa Cook said on Friday.
"I expect to see a drag on productivity in the near term stemming from the recent changes to trade policy and the related uncertainty," Cook said in remarks prepared for a delivery at an economics conference at Stanford University’s Hoover Institution.
Uncertainty around Trump’s plans could discourage investment, Cook said, while the rising cost of imported intermediate goods and equipment could also delay projects that would otherwise enhance productivity.
"Uncertainty around trade policy is likely to reduce business investment going forward. At this time, firms do not know the ultimate level and incidence of tariffs or their duration," Cook said. "Higher costs of imported materials and components could also cause firms to delay or scale back
their investment plans."
Less capital investment "can lead to slower technological innovation and adoption and decreased overall efficiency," she said, while higher trade barriers could "prop up less efficient firms" and make the economy less competitive.
Supply disruptions could create a further inefficiency, Cook said.
Artificial intelligence could raise productivity, she said, and it remains far from clear what the net result will be over time.
She said tariffs on their own could lower potential output. Just as recent gains in productivity have helped boost growth and bring down U.S. inflation, "a reduction in potential gross domestic product means less slack in the economy which, in tern, means greater inflationary pressure" and potentially higher interest rates, she said.