The Federal Reserve will be one of the many organizations that will have to deal with the effects of President Trump's reciprocal tariff plans. Loretta Mester, a former president of the Federal Reserve Bank of Cleveland Federal Reserve, shares her insider view on how the central bank may view the new levies.
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The tariffs are going to affect both parts of the Fed's mandate, full employment, maximum employment and inflation, and it's going to affect both parts over different time horizons. So that's what makes this in particularly difficult for the Fed. You know, we know that tariffs act like a tax, so it's going to reduce growth and weigh on the growth side, which means the employment side of the mandate. And then, of course, it will have at least a temporary effect on inflation. The question of whether it'll be more meaningful in terms of inflation for more persistence is really going to depend on, firstly, whether there is a lot of retaliation and then back and forth and tit for tat, which means that instead of being one shock, it's multiple shocks kind of like what we saw with the supply shocks during the pandemic. But also crucially on whether inflation expectations remain anchored at levels consistent with 2%, um, you know, 2% inflation. And that is probably a question at this point because we've already seen some of the inflation expectation measures move up. If inflation becomes embedded and people see higher prices because of the impact of the tariffs, they may start believing that inflation is moving back up again, even though it's come down quite a bit from the peak, and therefore it become can become a more persistent inflation problem. We didn't see that under the first Trump administration. In fact, inflation remained low, um, didn't move up, and what the Fed ended up doing is having to address a weaker growth economy and therefore started cutting rates, um, in September of that year. So in 2019. So again, you know, we don't really know how this is going to play out, but I think there's higher risks this time that the tariffs could be inflationary, and that's something the Fed's going to have to keep in mind and balancing both parts of the mandate.
