The Fed is Trapped in Group Ideas About Tariffs
If you’ve been curious about how Federal Reserve officials perceive Donald Trump’s tariff strategies, the latest minutes from the Federal Open Market Committee (FOMC) make it quite clear. They all consider tariffs to be inflationary. This consensus is not contested within the Eccles building. Every participant who addressed tariffs during the June meeting seemed to agree they would drive prices higher, without any dissenting views.
The discussion didn’t focus on whether tariffs would increase prices, but rather how quickly and for how long this effect would last. Some officials suggested that the impact might be subtle or delayed, especially if companies were still selling off inventory acquired prior to the tariffs. Others hinted that small businesses and lower-margin industries often have no choice but to pass these costs onto consumers. Additionally, even businesses that aren’t directly impacted might use the tariff environment to raise prices on related goods. Concerns about unanticipated inflation expectations were voiced.
“Participants noted that increased tariffs are likely to put pressure on prices to rise,” the minutes reported without qualification.
This viewpoint wasn’t confined to policymakers. The Fed staff mirrored this thinking, predicting that tariffs would “hide inflation this year and provide a slight boost in 2026.” Surprisingly, they actually adjusted their inflation projections down in June while improving their growth forecasts. Why? Because they assumed effective tariff rates would stay lower than expected due to a 90-day suspension announced in May.
“Staff forecasts for actual GDP growth were higher than those prepared for the May meeting, mainly because the announcement of trade policy led staff to reduce assumptions about effective tariff rates.”
This likely suggests an upward revision of the Fed’s inflation expectations. However, broader concerns are not predictions, primarily because the Fed hasn’t questioned its own assumptions.
Documenical Monetary Policy is Dangerous
What’s troubling is that there seems to be a lack of intellectual diversity on this matter within the central bank. No participants questioned whether tariffs might have a non-inflationary effect or even a deflationary impact, as tariffs can dampen demand. No one considered the possibility that tariffs could bolster domestic industries, reshape supply chains, or reduce reliance on adversarial nations. The only discussion revolved around how strong and persistent the price increases would be.
This consensus may reflect political convenience among elites, but it is analytically fragile. It overlooks the idea that tariffs might not just be short-term price manipulators, but instruments for structural economic reform, treating trade changes as costs rather than investments.
The Fed has made this error before. In 2021, it downplayed inflation as “temporary” and failed to adapt quickly, leading to escalating price pressures. Now, shaped by that mistake, the Fed perceives inflation as a looming threat, even as data suggests otherwise. Consequently, central banks automatically view tariffs as inflationary, regardless of context, scope, or long-term benefits.
This isn’t merely a cautionary note; it’s dogma.
With tariffs once again central to U.S. economic policy, this doctrine could place the Fed at odds with the elected president.
