New Research Suggests Last Year’s Tariff Hikes May Help Lower Inflation
A recent study from the San Francisco Federal Reserve Bank reveals that the significant tariff increases imposed by the Trump administration last year might actually help reduce inflation instead of pushing it higher. This finding opens the door for potential interest rate cuts as a suitable policy response.
Last year, U.S. imports faced an average tariff of 17%, a steep rise from less than 3% at the close of 2024, marking the highest rate in nearly 90 years, according to the Yale Budget Lab.
Researchers Regis Barnichon and Aayush Singh highlighted that this dramatic increase in tariffs could potentially hurt job growth while simultaneously cooling inflation. This was detailed in the latest Economic Letter from the regional Fed bank, which expands upon a working paper they released last November.
The study draws insights from 150 years of data collected from the United States, France, and the UK.
In light of the tariff hikes, the Federal Reserve had held interest rates steady for most of last year, fearing that these tariffs would contribute to rising inflation, supported by both theoretical models and some historical data. However, by September, signs pointing to weaknesses in the labor market and a belief that the inflationary effects of these tariffs would be temporary led the Fed to initiate a series of rate cuts, reducing short-term borrowing costs by 0.75% over the course of 2025.
The researchers acknowledged that the historical patterns observed might not fully apply to today’s economy. They noted that modern U.S. manufacturing is now more dependent on imported goods than in the past, increasing the likelihood that new tariffs could lead to higher inflation this time around.
Additionally, they pointed out that economic uncertainty and falling stock prices often go hand-in-hand with significant tariff increases. This economic backdrop may explain why previous tariff hikes were associated with reduced inflation. However, they did not explore how these historical trends unfolded during last year, when economic uncertainty surged, but major stock indexes saw substantial gains, leading to increased household spending and a boost to the economy.
