A question we get asked a lot about is how the Federal Reserve is likely to react to President-elect Donald Trump’s tariffs. The short answer is thatraising duties on importswill be inflationary, will slowdown U.S. growth or even tip the economy into a recession, and will force the Fed to raise interest rates in reaction to higher prices. Sometimes a single analyst or pundit claims all three things will happen.
. Ironically, some of the same people who claim the Fed would raise rates in response to tariffs argued that the Fed was over-tightening in 2022 and 2023 because they saw inflation as mostly a result of supply constraints. They understood properly that the main effect of higher rates is on the demand side, which means they would not be very effective at holding down “pass-through” price increases from tariffs.
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