Trump’s Tariffs vs. the Fed: Jobs or Inflation?

The Delicate Balance Between Employment and Inflation Control

The recent tariffs implemented by President Trump have created a complex scenario for the Federal Reserve (Fed), the central bank of the United States, whose mission is to maintain as much employment as possible while ensuring price stability.

This is not a trivial challenge. In the current economic environment, every decision I make has profound consequences for both the American worker and consumer purchasing power.

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The Two-Way Mechanism of Tariffs on the Economy

Trade tariffs generate contradictory impacts on the economy, influencing economic objectives in opposite ways and at different times:

Impact on the Labor Market: The Delayed Effect

In the short term, tariffs may even protect some jobs in specific sectors such as steel and manufacturing. However, what I observe with concern is the subsequent cascading effect:

• Deceleration of growth: Tariffs essentially act as an additional tax, reducing the purchasing power of consumers and businesses.
• Reduced investment: Companies postpone investment decisions due to trade uncertainty.
• Impact on supply chains: Industries dependent on imported inputs face higher costs, reducing their margins and contracting capacity.

A study by the Peterson Institute for International Economics estimates that each job “saved” by tariffs in protected sectors could cost the US economy up to $900,000, when taking into account the negative effects on other sectors.

Trump announces reciprocal tariffs – Photo: REUTERS/Carlos Barria

Impact on Inflation: The Immediate Effect

The inflationary effect of the tariffs is much quicker and more direct:

• Instant increase in the prices of imported goods: Products such as electronics, clothing and automotive parts rose by 10-25% in the first few weeks.
• Passed on to consumers: Approximately 95% of the additional costs of tariffs end up being passed on to American consumers.
• Pressure throughout the production chain: Even domestically manufactured products suffer price pressure when they contain imported components.

Data from the University of Chicago shows that the previous tariffs cost American families an average of $831 a year. The new rounds could raise that figure to more than $1,200 annually.

Why This Time Is Different: Unstable Economic Terrain

In the first round of tariffs, the Fed managed to keep inflation under control. However, the current scenario poses considerably greater risks due to several factors:

1. Labor Market Still Resilient

The U.S. labor market remains surprisingly strong, with an unemployment rate below 4%, which could amplify the inflationary impact of tariffs. When workers have bargaining power, it’s easier for companies to pass on higher costs.

2. Fragile Inflation Expectations

After the inflation shock of 2021-2023, consumer inflation expectations have not yet fully returned to the 2% target. Our internal surveys show that:

• 68% of consumers expect inflation above 3% next year
• 47% of companies plan price increases in the coming quarters

3. Supply Chains Still Recovering

Global supply chains are still recovering from the recent pandemic and geopolitical shocks. A new disruption caused by tariffs and possible retaliation could trigger new bottlenecks and price increases.

Monetary Policy Strategy in Turbulent Times

Diante desse cenário desafiador, a abordagem precisa ser simultaneamente firme e flexível:

1. Intensive Monitoring of Key Indicators

We must closely monitor three key metrics that will serve as warning signs:

• Long-term inflation expectations: If they exceed 2.5%, this indicates a risk of deleveraging.
• Cost pass-through index: Measures the ease with which companies pass on higher costs to consumers.
• Underlying inflation metrics: Especially services excluding housing, which have been persistently high.

Granular approach by sector

Not all sectors of the economy react equally to tariffs. We must segment our analysis to identify pockets of inflationary pressure:

• Durable goods: Cars, appliances and electronics are particularly vulnerable.
• Processed foods: Imported ingredients and packaging create cost pressure.
• Construction: Materials such as imported steel, aluminum and wood products can affect housing costs.

Strategic Communication with the Market

Transparency is a powerful tool and communication will need to be stepped up to:

• Explain clearly how tariffs affect our monetary policy decisions.
• Reinforce our unwavering commitment to the 2% inflation target.
• Prepare the markets for possible interest rate adjustments if necessary.

Historical Lessons: What Economic History Teaches Us

Tariffs are nothing new in the American economy. I can draw valuable lessons from previous episodes:

The Smoot-Hawley Act of 1930

By imposing broad tariffs during the Great Depression, countries provoked worldwide retaliation and worsened the economic downturn. This historical episode makes one thing evident: trade wars seldom produce winners and frequently inflict harm on their initiators.

The Nixon Shock of 1971

When President Nixon imposed a 10% surcharge on imports, the inflationary impact was swift and contributed to the stagflation of the 1970s. This episode demonstrates how tariffs can complicate an already complex inflationary situation.

Preparing for Future Scenarios

We need to be prepared for several possible scenarios:

Scenario 1: Temporary Tariffs with Limited Impact

If tariffs are used mainly as a negotiating tool and withdrawn after trade agreements, the impact may be manageable with small adjustments to interest rates.

Scenario 2: Permanent Tariffs with Global Retaliation

This is the most challenging scenario. It would require a more hawkish stance in monetary policy, potentially sacrificing growth to contain inflation.

Scenario 3: Structural Adaptation of the Economy

In the long term, American companies may reorganize their supply chains, reducing their dependence on imports. This process, while positive for economic resilience, could maintain inflationary pressures for prolonged periods.

Final thoughts: Balancing responsibilities

The Federal Reserve has responsibility for the entire American economy, not just specific sectors. Its decisions directly impact:

• Families: Their purchasing power and access to credit.
• Businesses: Their ability to plan, invest and hire.
• Financial markets: The stability needed to finance economic growth.

The implementation of tariffs is a trade policy decision outside the Fed’s direct control. Its main responsibility is to ensure that, whatever the commercial environment, the institution does what is necessary to keep the American economy as close as possible to full employment with stable inflation.

The next few months will be critical in seeing how these impacts materialize. The Federal Reserve must prepare to adjust its strategy as necessary, always with the ultimate goal of protecting the long-term economic health of the United States.