Ok, what’s the deal with tariffs?
Those pesky little economic tools that sound as boring as a lecture on paint drying, but that actually have a HUGE impact on the (global) economy.
Tariffs are simply taxes on imported goods.
I’m sure you know that! RIGHT?!
You probably do.
But why does the Federal Reserve now seem like it’s stuck between a rock and… an even rockier rock?
Let me show you.
Picture this…
Tariffs are rolled out.
And suddenly, businesses start scrambling.
They start hunting for new trade partners like contestants on a dating show, and here’s the kicker… prices on imports?
They shoot up like a meme stock.
And you know what that means…
Consumer prices rise.
And the next thing you know, inflation’s knocking at the door like it’s invited to the party.
So, what’s the Fed’s first instinct?
“Let’s hike rates”
Of course!
Cool inflation, keep things balanced.
A walk in the park, right?
Wrong.
Here’s where it gets tricky…
Growth.
See, inflation’s is tricky for the economy.
It erodes purchasing power.
Add higher interest rates, and there you go!
You’ve tightened right at a time when growth is already vulnerable.
That’s where the dilemma for the Federal Reserve starts…
They live by the Taylor Rule.
Basically…
- Hike rates to cool inflation.
- Lower them to spur inflation and revive growth.
But tariffs?
Oh, tariffs are a double edged sword.
They’re both inflationary and recessionary.
It’s like having to pick between stepping on a Lego or walking barefoot on hot sand. Neither is fun, and both make you question your choices.
The ideal solution?
Gradual, small tariffs.
A teeny 1% or 2%, rolled out slowly over months.
That’s manageable.
But try tell that to Trump!
That’s not his style 😉
So what if he decides to go full throttle on tariffs?
What should the Federal Reserve do?
Two words:
Don’t overreact.
This kind of inflation?
It’s transitory. Yes, I said it…
Transitory.
Look, I know that word’s been dragged through the mud over the past couple of years. But in this case, it fits!
Tariff driven inflation fades as supply chains adapt.
If the FED reacts and hikes rates too aggressively?
The spillovers could be worse than the tariffs themselves.
So yes!
Interesting dilemma for the Federal Reserve right there.
Up to now Powell to strike the right balance…
Once more.
