New research from the Federal Reserve Bank of San Francisco has challenged the prevailing narrative among economists regarding the impact of tariffs on inflation and employment in the United States. The study, led by Regis Barnichon and Ayush Singh, examined the short-term effects of tariffs over the past 150 years, concluding that higher tariffs actually lead to lower inflation and an increase in unemployment.
Nick Timiraos, a reporter for the Wall Street Journal, highlighted this significant finding on social media, indicating that the century and a half of data contradicts the common belief that “tariffs will bring inflation to the U.S. and cause disaster.” According to the research, the imposition of tariffs reduces aggregate demand, which in turn exacerbates unemployment levels and creates downward pressure on prices.
The research detailed that historically, significant increases in tariff rates — approximately 4 percentage points — resulted in a 2 percentage point decrease in inflation, while unemployment rose by around 1 percentage point. This pattern remained consistent even in the post-World War II era, where tariff rate changes were more moderate. The findings suggest that the economic effects of tariffs are substantial enough to warrant serious consideration, especially when applicable data is examined not only in the U.S. but also in other nations like France and the United Kingdom.
Timiraos, known for his insight into Federal Reserve communications, has reported rising tensions within the Fed concerning interest rate decisions, particularly regarding potential cuts in December. The primary concern is balancing the risks of persistent inflation against a weakening labor market. Compounding this issue is the impact of delays in the release of official economic data due to prolonged government shutdowns, which has heightened the discord among Fed officials.
While recent rate cuts were nearly unanimous among Fed members in September and October, the prevailing sentiment has shifted, leading to decreased confidence, as evidenced by the drop in U.S. stock indices last week. Analysts interpret the dissemination of the new study by Timiraos as an indication that the Federal Reserve’s communication strategy remains firmly “hawkish,” which might influence future decisions related to tariffs and interest rates, aligning them more closely with the current economic policy landscape.
As markets and policymakers continue to navigate these findings, the interplay between tariffs, inflation, and employment remains a critical topic for both economic stability and future growth strategies in the United States.
