Fed's flawed calculations on President Trump's tariffs
A new New York Fed study claims that tariffs imposed during President Trump's first term inflicted trillions of dollars in economic damage and severe “welfare losses” on Americans, but during the Trump administration. An unprecedented situation occurred Rising household incomes, a booming stock market, and historically low unemployment rates.
Something doesn't fit.
I like it very much established economic analysisthe Fed's investigation yielded breathtaking and dire results. The Fed said the tariff announcement wiped out $4.1 trillion in value from the U.S. stock market, created a 3% “welfare loss” and spread uncertainty across the economy. Verdict: It's because of customs duties for causing serious damage to the American economy.
This fails even the simplest test of economic plausibility. Because during the Trump administration (at least before the pandemic), era of widespread economic prosperitystock price rise, price stability. Any finding that the tariffs caused significant damage would have to overcome the inescapable fact that the U.S. economy prospered during President Trump's term.
Americans know this even if the authors of the Fed study, Mary Amity, Matthew Gomez, Sang-Hung Cong, and David E. Weinstein, don't. Every poll shows that Americans understand that they were better off economically when Trump was president.. And over the past month, economic optimism has soared with the election of President Trump.
A more detailed investigation reveals that this investigation is not a verdict on tariffs; A cautionary tale about the dangers of narrow frames. That conclusion is based on Selective and short-sighted methodology It exaggerates short-term volatility while ignoring the economy's incredible adaptability. These are artifacts of research methodology rather than descriptions of economic reality.
Looking beyond the Fed's 10-day window
At the heart of FRB research is an event study approach. Measuring stock market reactions immediately after tariff announcements And we only consider them within a narrow window of 10 days after publication. The idea is simple. Tariffs have disrupted markets and caused immediate declines in stock valuations, which the study views as economic damage.
As a result of the research, Within 10 days after price announcement During the US-China trade war from 2018 to 2019, the cumulative impact on US stock market valuations was a decline of 11.5%, equivalent to a loss of $4.1 trillion in corporate equity value.
But why stop at 10 days? Why not look at 15, 30, or 60 days? Zoom in and the story changes dramatically.
- in 15ththe S&P 500 is 6.23% increase.
- in 20 daysstocks go up 6.0%.
- in 30 daysthe gain increases as follows. 7.24%.
- in 60 daysthe market is still rising 3.24%.
Just adding two more trading days to the Fed's survey, making it 12 days instead of 10, would give you a 4.7 percent increase.
Patterns emerge from these long windows. The market's initial fears have been replaced by recovery and growth.. Far from suggesting lasting damage, the medium-term recovery suggests that investors and economies have adapted quickly to the new trade environment.
Focus on research for 10 days Amplifying short-term noise and creating a distorted narrative. Markets are reacting to uncertainty, and tariffs have certainly been disruptive. But chaos is not destruction. The market's broader trajectory tells a story of resilience, not vulnerability.
Stock price volatility ≠ economic damage
This study further errs in temporary treatment The stock market will fall to compensate for the economic damage.. Stock prices are driven by sentiment as much as fundamentals, and tariff announcements generate a lot of sentiment and negative headlines, with fears of retaliation, uncertainty around supply chains, and speculation about global trade weighing on investors. may have been frightened.
But let's consider the real economy. During the two years of the trade war, the S&P 500 made cumulative gains. 7.24%including stellar 31.49% increase in 2019. of the economy expanded The growth rate was 2.9% in 2018 and 2.3% in 2019, far exceeding the Fed's long-term growth forecast of 1.8%. The unemployment rate averaged 3.9% in 2018, but it further declined to 3.7% in 2019. Domestic manufacturing has begun to regain market share. Consumer prices rose by just 1.9% in 2018 and 2.3% in 2019. Real median household income experiences historic rise of 6.8 percentwhich reached $68,703 in 2019. This was the largest annual increase on record. If tariffs caused lasting harm or “welfare loss,” where is the evidence?
The truth is that tariffs Realignment of world trade. The supply chain has changed. Businesses adapted. Consumers adjusted. The short-term volatility captured in the Fed's survey is real, but it tells us little about the underlying strength of the economy.
Convenient omission: broader context
The Fed claims to control for simultaneous events such as data releases on jobs and inflation, but its analysis fails to account for the broader economic environment in 2018-2019.
- Federal Reserve Policy: The Federal Reserve raised interest rates four times in 2018, tightening financial conditions and increasing market uncertainty. The Fed reversed course in 2019, cutting interest rates three times and spurring market recovery.
- Concerns about global growth: The trade war coincided with widespread concerns about a slowing global economy, weighing on export-heavy industries.
While these factors undoubtedly influenced the market, the study single-handedly singles out tariffs as the culprit. It's a useful story, but it's simplistic.
customs claims
Critics of tariffs like to tout the legitimacy of free trade, but they ignore the lopsided reality of U.S.-China trade. For decades, American workers bear the brunt of globalizationwe saw factories shut down and communities hollowed out while China exploited its access to Western markets.
The 2018-2019 tariffs were a necessary amendment. They brought China to the negotiating table and signaled that the United States would no longer tolerate a unilateral trade relationship. Tariffs have certainly caused disruption, but disruption is often the price of progress. of The long-term benefits of recalibrating trade policy far outweigh any temporary fluctuations. Caught in a Fed investigation.
The real story of what President Trump's critics call a “trade war” is not about economic damage but about resilience. Tariffs shocked markets, but the economy adjusted and prospered. The Fed's 10-day window captures the panic but misses the recovery. Beyond the egregious tariffs, the findings highlight the following: The adaptability of American companies and investors.
