A trade war puts pressure on the Federal Reserve

Subscribe to enjoy similar stories. Virtually all economic research and historical experience show that the costs of tariffs, including the reduction of future potential growth, far outweigh any benefits of protecting the U.S. from international competition and bringing jobs home.

President Trump’s first-term tariffs failed to achieve their objectives of reducing the trade deficit and increasing domestic manufacturing jobs and proved costly. Now his erratic and unpredictable policymaking on tariffs is heightening uncertainties as households and businesses brace themselves for higher prices and disruptions to production. The falling stock market reflects investors’ understanding of this logic and anticipation of economic losses.

Mr. Trump’s aggressive tariff policies pose another serious risk: The weaker economic activity, higher unemployment and likely increased prices that will result run counter to the Federal Reserve’s dual mandate of 2% inflation and maximum employment. This will strain the Fed’s monetary policy, pressuring it to make short-run decisions that may compound the longer-run costs of the tariffs.

The Fed’s dual mandate is difficult enough to achieve without tariffs. After it extended excessively easy policy to accommodate the $1.9 trillion March 2021 American Rescue Plan—which fueled a surge in inflation—the Fed raised rates aggressively from March 2022 to July 2023. In late 2024, it lowered rates by a percentage point as the economy remained resilient and continued to grow.