Monthly Archives: July 2025

Attack Private Sector With Tariffs, Then Attack Pricing

26 Saturday Jul 2025

Posted by in Tariffs, Tax Incidence

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An opinion piece caught my eye written by one Chad Wolf. It’s entitled: “Retailers caught red-handed using Trump’s tariffs as cover for price gouging”. A good rule is to approach allegations of “price gouging” with a strong suspicion of economic buffoonery. You tend to hear such gripes just when prices should rise to discourage over-consumption and encourage production. The Wolf article, however, typifies the kind of attack on capitalism we hear increasingly from the “new right” (and see this).

Wolf, a former Homeland Security official in the first Trump Administration, says that large retailers like Walmart and Target are ripping off American consumers by raising prices on goods that are, in his judgement, “unaffected” by tariffs.

We’ll get into that, but first a quick disclaimer: I have no connection to Walmart or Target. Sure, I’ve shopped at those stores and I’ve filled a few prescriptions at a Walmart pharmacy. Maybe I have an ETF with an interest, but I have no idea.

Competition and Consumer Choice

Of course, no one forces consumers to shop at Walmart or Target. Those stores compete with a wide variety of outlets, including Costco and Amazon, the latter just a few clicks away. In a market, sellers price goods at what the market will bear, which ultimately serves to signal scarcity: a balancing between the cost of required resources and the value assigned by buyers. Unfortunately, in the case of tariffs, buyers and sellers of imports must deal with an artificial form of scarcity designed to extract revenue while benefitting other interests.

Wolf touts the “gift” of a free market for American businesses, as if private rights flow from government beneficence. He then decries a so-called betrayal by large retailers who would “price gouge” the American consumer in an effort to protect their profit margins. The free market is indeed a great thing! But his indignance is highly ironic as a pretext for defending tariffs and protectionism, given their destructive effect on the free operation of markets.

Broader Impacts

Wolf might be unaware that tariffs have an impact on a large number of domestically-produced goods that are not imported, but nevertheless compete with imports. When a tariff is charged to buyers of imports, producers of domestic substitutes experience greater demand for their products. That means the prices of these import-competing goods must rise. Furthermore, the effect can manifest even before tariffs go into effect, as consumers begin to seek out substitutes and as producers anticipate higher input costs.

Obviously, tariffs also impinge on producers who rely on imports as inputs to production. It’s not clear that Wolf understands how much tariffs, which represent a direct increase in costs, hurt these firms and their competitive positions.

“Expected” Does Not Mean “Unaffected”

Wolf cites the Federal Reserve’s Beige Book report (which he calls a “study”) to support his claim that businesses are gouging buyers for goods “unaffected” by tariffs. Here is one quote he employs:

“A heavy construction equipment supplier said they raised prices on goods unaffected by tariffs to enjoy the extra margin before tariffs increased their costs,” the Beige Book report said.“

Read that again carefully! Apparently Wolf, and whoever added this to the Fed’s Beige Book, thinks that being “unaffected by tariffs” includes firms whose future costs, including replacement of inventories, will be affected by tariffs! He goes on to say:

“… Walmart has already issued price hikes under the guise of tariff costs.“

The examples at his “price hikes” link were for Chinese goods in April and May, after Trump announced 145% tariffs on China in April. In mid-May, Trump said China would face a lower 30% tariff rate during a 90-day “pause” while a trade agreement was negotiated. It is now 55%, but the point is that retailers were forced to play a guessing game with respect to inventory replacement costs due to uncertainty imposed by Trump. They had a sound reason for marking up those items.

Fibbing on the Margin

Here’s an excerpt from Wolf’s diatribe that demonstrates his cluelessness even more convincingly:

“We all know many of these large retailers are sitting on comfortable, even expanded, profit margins because of the price hikes from COVID-19 that never came down. But it’s not enough for them. They want to fleece the American consumer and blame it on President Trump’s America First agenda.“

So let’s take a look at those profit margins that “never came down” after the pandemic, but in a longer historical context. Here are gross margins for Walmart since 2010:

Walmart’s margin today is about the same as the average for discount stores, and it is lower than for department stores, retailers of household and personal products, groceries, and footwear. Furthermore, it is lower today than it was ten years ago. While the margin increased a little during the pandemic, it fell in its aftermath, contrary to Wolf’s assertion. That the company has rebuilt margins steadily since 2023 should be viewed not as an indictment, but perhaps as a testament to improved managerial performance.

Wolf goes on to quote a former Walmart CEO who says that the 25 basis point increase in the gross margin in the latest quarter (from ~24.7% to 24.94%) indicates that the chain can “manage” the tariff impact. Of course it can, but that would not constitute “price gouging”.

A Trump Lackey

Of course, Wolf is taking his cues from Donald Trump, who has been bullying American businesses to “eat” the cost of his tariff onslaught, rather than passing them along to the ultimate buyers of imported goods. However, private businesses should not be expected to take orders from the President. This is not Mussolini’s Italy. Moreover, anyone familiar with tax incidence will understand that sellers are likely to eat some portion of a tariff (sharing the burden with buyers) without jawboning from the executive branch. That’s because buyers demand less at higher prices and sellers wish to avoid losing profitable sales, to the extent they can. But the dynamics of this adjustment process might take time to play out.

It’s also worth noting that a retailer might attempt to hold the line on certain prices in an uncertain cost environment. This uncertainty is a real cost inflicted by Trump. Meanwhile, pointing to increased prices for domestic goods, even if they are truly unaffected by tariffs, proves nothing without knowledge of the relevant cost and market conditions for those goods. It certainly doesn’t prove an “unpatriotic” attempt to cross subsidize imported goods.

In fact, one might say it’s unpatriotic for the federal government to restrict the market choices faced by American consumers and businesses, and for the President to tell American sellers that they better “eat” the cost of tariffs (or else?). And say, what happened to the contention that tariffs aren’t taxes?

Conclusion

Attacks on sellers attempting to recoup tariff costs are unfair and anti-capitalist. They are also somewhat disdainful of the economic sovereignty of American consumers, though not as much as the tariffs themselves. In the case described above, Chad Wolf would have us believe that sellers should not act on their expectations of near-term tariff increases. He also fails to recognize the impact of tariffs on import-competing goods and the cost of tariffs borne by producers who must rely on imported goods as inputs to production. Even worse, Wolf misrepresents some of the evidence he uses to make his case.

More generally, American businesses should not be bullied into taking a hit just because they serve customers who wish to buy imported goods. There is nothing unpatriotic about the freedom to choose what to goods to buy, what goods to stock, and how to maintain profitability in the face of government interference.

June Budget Surplus and Wishful Tariff Thinking

21 Monday Jul 2025

Posted by in Deficits, Tariffs

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The federal government ran a budget surplus of $27 billion in June, much to the surprise of nearly everyone. The Trump Administration and MAGA-friendly media were eager to credit a big revenue boost from higher tariffs, which… ahem … they have assured us are not really taxes. In any case, to attribute the June surplus to tariffs is flatly ridiculous. The truth is these “non-tax” magic revenue generators made a relatively small contribution to the apparent shift in the government’s fiscal position in June. And I say “apparent” because the surplus itself was something of a mirage.

Yes, tariffs brought in a total of almost $27B during June, which is about the same as the surplus recorded, but that was purely coincidental. It does not imply that tariffs “created” a surplus. Nor does it suggest that tariffs might just be able to balance the federal budget. Not a chance!

Here is one of two other sides of the story: the Treasury reported that the budget balance this June improved from a year ago by a total of $89 billion, from a deficit of $72B in June of 2024 to the aforementioned surplus of $27B in June 2025. Outlays were lower by about $38B this June, accounting for almost 43% of the improvement. Receipts were about $59B higher, with tariffs increasing by $20B relative to June 2024. So tariffs contributed just over a third of the boost in receipts. Altogether then, tariffs accounted for 22.5% of the improvement in the June budget balance between 2024 and 2025. That version of the story, as far as it goes, does not support the contention that tariffs “caused” the budget surplus in June, only that tariff revenue was a contributing factor.

Let’s dig a little deeper, however. Were it not for so-called “calendar adjustments” made by the Treasury, it would have reported a deficit of $70B in June. The reason? The first day of June fell on a Sunday this year, so certain payments were shifted to the last prior business day: Friday, May 30. That reduced June outlays substantially. Moreover, an extra business day in June 2025 added revenue. So the surplus in June was, in essence, an artifact of the calendar and had little to do with tariff revenue.

Incidentally, no one should be surprised by the growth of tariff revenue collected in June. When a tax rate more than triples (from a pre-Trump average of about 3% to 10% plus in June — net of tariff exclusions), one should expect revenue from that tax to increase substantially (and it was probably exaggerated by the extra business day).

Oh wait! Did I say tax?

With time, buyers will adjust and scale back their import purchases, reducing the revenue impact of the tariff hikes. However, we still don’t know how high tariffs will go. That means we could see substantially higher tariff revenue, though the demand response and a likely negative impact on incomes will cut into those gains. Either way, the revenue potential of tariffs is limited. Some estimates put the revenue impact of Trump’s tariffs at less than $250B annually. That seems conservative, but it’s significant revenue if it holds up. Still, it won’t come close to balancing a federal budget that’s almost $2 trillion in the hole. It certainly doesn’t justify a headlong dive into protectionism, which amounts to taking a crap on the economic freedom and prosperity of the American public.

Stablecoin Digital Dollar Substitutes

16 Wednesday Jul 2025

Posted by in Crypto, Monetary Policy

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Stablecoins are a very hot topic, and not only among crypto enthusiasts. This is “Crypto Week” in Congress, but current activity in the stablecoin (SC) space ranges from an explosion of transactions and issuance by banks and other institutions, plans for issuance by other businesses like large retailers, the introduction of new embedded SC features, laws affirming the right of use in non-crypto transactions, regulatory maneuvers, and central bank scrutiny.

The Digital Money Realm

An SC is a digital asset convertible to currency at a value pegged to some other asset with a stable market value. SCs are almost all pegged to the dollar, but they can be algorythmically pegged to a basket of currencies, Treasury securities, gold, silver, or other commodities, or a combination of various kinds of assets. Still, it’s thought that the growth of SCs will reinforce the dollar’s position as the world’s dominant currency.

SCs had their genesis and are still primarily used for settlement of transaction involving crypto-currencies and cross-border transactions. They function as a store of value and provide investors exposure to the underlying asset(s), but they are increasingly seen as transactions media as well. They offer a direct channel to instant settlement without other intermediaries and with low transaction costs.

Unfortunately, the purported stability of SCs has not always held up. In 2022, the collapse of the SC Terra/Luna demonstrated that a run on an SC is a real risk. Pending legislation in the U.S. will attempt to address this risk (see below). Tether is the dominant SC on the market today, and its issuer, Tether Ltd., claims to back it with 100% fiat currency reserves. However, those claims have come under suspicion with concerns about the true liquidity of their backing. Tether has other problems, including money laundering allegations. The bills now under consideration in the Congress would require a major change in the way Tether and other SC issuers do business in the U.S.

Crypto-Week Pending Legislation

SC issuers hold levels of reserves against their outstanding value, but currently only under various state regulations. That’s likely to change soon. Bipartisan legislation is moving through Congress: the so-called GENIUS Act was approved by the Senate in June; the STABLE Act in the House has many similar provisions.

The GENIUS and STABLE bills would require public disclosure, frequent audits, and establish 100 percent reserve requirements for so-called “payment” SCs. The bills also stipulate that reserves must be held in highly liquid assets like U.S. dollars, money market fund shares, and Treasury securities maturing within 93 days. This is likely a disappointment to “hard money” partisans who’d like to see SCs backed by precious metals. Both bills would also prohibit interest-bearing SCs, obviously an impediment to risk-taking by issuers and also a nod to banks hoping to avoid new competitive pressures. Altogether, the bills would make SCs more currency-like and less vehicles for saving or speculation of any kind.

A third piece of federal legislation, the so-called CLARITY Act, would sort out the regulatory roles of different federal agencies pertaining to digital assets.

CBDC

Central banks like the Federal Reserve have taken a keen interest in SCs, which amount to an alternative monetary system. Advocates of a Central Bank Digital Currency (CBDC) maintain that it would have greater stability and public trust than privately-issued SCs. No doubt a CBDC would facilitate investigation of fraud and money laundering, and supporters say it would help preserve the sovereignty of the U.S. monetary system.

However, a CBDC is off the table in the U.S. for the foreseeable “political” future. President Trump has issued an executive order (EO) prohibiting the development or issuance of a CBDC in the U.S. The EO asserts that a CBDC would not promote stability and in fact would do the opposite.

Opposition to a CBDC revolves around several issues: 1) it would cause an atrophy in the private development of digital assets and SCs in the U.S.; 2) a CBDC would create grave concerns about surveillance and potential use of the CBDC as an input to a social credit tool; 3) the alleged risk of a CBDC to the stability of the banking system. #3 is apparently in reference to possible disintermediation when a CBDC is substituted for traditional bank deposits — but SCs have been noted for that same risk.

Neither the GENIUS Act nor the STABLE Act explicitly prohibits a CBDC, which has riled a few conservatives. However, there are provisions in the GENIUS Act that effectively rule a CBDC out at a “retail” and consumer level.

A fourth piece of legislation, the Anti-CBDC Surveillance State Act, would prohibit the Federal Reserve from “… testing, studying, developing, creating, or implementing a central bank digital currency and bar the banks from using such a currency to implement monetary policy.” The bill was passed by the House of Representatives in May, but it has yet to clear the Senate. Some House members might like to have its major provisions incorporated into the current SC legislation, but that remains to be seen, and if such a revision was passed by the House it would require another Senate vote in any case.

Not Quite Like Cash

As a “programmable” currency, a CBDC could be used to control transactions deemed impermissible by a future “regime”. This would be a manifestation of what Dave Friedman calls “The Convergence of AI and the State”. His concerns extend to privately-issued SC’s as well, inasfar as SCs and other payment systems have us “sleepwalking into a cashless society”.

Privacy has been a downside to SCs and all blockchain transactions from the start, but there are several technological extensions that could protect SC transactions and accounts from nosy governments or nefarious actors. Taurus, a crypto custodian, has launched a Stablecoin contract for businesses with privacy features using so-called zero knowledge proofs that would satisfy “Know Your Customer” requirements and anti-money laundering laws, but without revealing amounts paid or the recipient’s identity. Still, there are legitimate concerns regarding access by regulators, and law enforcement could ultimately gain access to account and transaction data given a reasonable suspicion of wrongdoing. This will almost certainly be addressed in any SC legislation that makes it to Trump’s desk.

Macro Policy Implications

Will broader adoption of SCs compromise the ability of central banks to conduct monetary policy? Scott Sumner says no:

“The Fed will still control the monetary base, and they have almost unlimited ability to adjust both the supply and the demand for base money.  This means they will be able to react to the creation of money substitutes as required to prevent any impact on macroeconomic objectives such as employment and the price level.”

When Sumner’s says the Fed controls the demand for base money, he refers to the interest rate the Fed pays on bank reserves.

As noted above, however, it’s widely feared that public substitution of SCs for bank deposits could drain bank reserves, adding variability to the broader demand for monetary assets, thus weakening the relationship between policy actions, the money stock, and other key variables.

Even if this is correct and Summer is wrong, the Federal Reserve should be treated as a special (but very important) case. That’s because the dollar is the dominant global currency, almost all SCs are backed by dollars, and essentially all SCs used in the U.S. will be backed by dollar-denominated assets should GENIUS-type legislation become law. That severely limits any potential disintermediation that SCs might otherwise cause. Control of bank reserves should be manageable, and therefore SCs will not meaningfully weaken the Fed’s control of base money or the transmission of monetary policy.

Things are not so simple for countries having home currencies that play a minor role internationally. SC’s backed by other currencies or assets are then more likely to weaken the central bank’s control of domestic monetary assets. In fact, SCs might create greater vulnerability to “dollarization” in some countries, which would weaken the efficacy of domestic monetary control. If Sumner is correct, the existence of SCs would still add a layer of variability for these central banks, making policy adjustments more complex and error-prone.

Conclusion

Stablecoins are already huge in the crypto world and they are making inroads to the broader financial sector, factor payments, and everyday consumer decisions. Naturally they have attracted a great deal of interest in policy circles, both for their benefits and the risks they present. The purported liquidity and stability of SCs, together with a few prior missteps, make the legislation now before Congress a key to broader adoption, particularly the provisions on reserves and transparency. While not strictly a part of the legislation, the incorporation of privacy features will enhance the value of SCs to all users.

Conservatives and libertarians undoubtedly will welcome the proscription on development of a digital currency by the Fed. Private SCs backed by dollar reserves should allow the Fed to maintain ample control over the monetary base and the supply of monetary assets. Moreover, the growth of dollar-backed SCs will strengthen the dollar’s dominance in international trade and finance. However, while stablecoins can and do reduce transaction costs in a variety of circumstances, dollar-backed SCs cannot be better stores of value than the dollar itself, which we know has had its shortcomings over the years.

Why We Can’t Have Nice Low Rates In the U.S.

08 Tuesday Jul 2025

Posted by in Interest Rates, Monetary Policy

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Donald Trump’s latest volley against the Federal Reserve accuses the central bank of fixing interest rates at artificially high levels compared to rates in other developed countries. He repeatedly demands that the Fed make a large cut to its federal funds rate target, in the apparent belief that other rates will immediately fall with it. While a highly imperfect analogy, that’s a bit like saying that long-term parking in New York City would be cheaper if only hourly rates were cut to what’s charged in Omaha, and with only favorable consequences. Don’t tell Mamdani!

Trump believes the Fed’s restrictive monetary policy is preventing the economy from achieving its potential under his policies. He also argues that the Fed’s “high-rate” policy is costing the federal government and taxpayers hundreds of billions in excessive interest on federal debt. High rates can certainly impede growth and raise the cost of debt service. The question is whether there is a policy that can facilitate growth and reduce borrowing costs without risking other objectives, most notably price stability.

Delusions of Control

The financial community understands that the Fed does not directly control rates paid by the Treasury on federal debt. The Fed has its most influence on rates at the short end of the maturity spectrum. Rates on longer-term Treasury notes and bonds are subject to a variety of market forces, including expected inflation, the expected future path of federal deficits, and the perceived direction of the economy, to name a few. The Fed simply cannot dictate investor sentiments and expectations, and the ongoing flood of new Treasury debt complicates matters.

Another fundamental lesson for Trump is that cross-country comparisons of interest rates are meaningless outside the context of differing economic conditions. Market interest rates are driven by things that vary from one country to another, such as expected inflation rates, economic policies, currency values, and the strength of the home economy. Differences in rates are always the result of combinations of circumstances and expectations, which can be highly varied.

A Few Comparisons

A few examples will help reinforce this point. Below, I compare the U.S. to a few other countries in terms of recent short-term central bank rate targets and long-term market interest rates. Then we can ask what conditions explain these divergencies. For reference, the current fed funds rate target range is 4.25 – 4.5%, while 10-year Treasury bonds have traded recently at yields in the same range. Current U.S. inflation is roughly 2.5%.

It’s important to remember that markets attempt to price bonds to compensate buyers for expected future inflation. Currently, the 10-year “breakeven” inflation implied by indexed Treasury bonds is about 2.35% (but it is closer to 3% at short durations). That means unindexed Treasury bonds yielding 4.4% offer an expected real yield just above 2%. Accounting for expected inflation often narrows the gap between U.S. interest rates and foreign rates, but not always.

Switzerland: The Swiss National Bank maintains a policy rate of 0%; the rate on 10-year Swiss government bonds has been in the 0.5 – 0.7% range. Why can’t we have Swiss-like interest rates in the U.S.? Is it merely intransigence on the part of the Fed, as Trump would have us believe?

No. Inflation in Switzerland is near zero, so in terms of real yields, the gap between U.S. and Swiss rates is closer to 1.4%, rather than 3.8%. But what of the remaining difference? Swiss government debt, even more than U.S. Treasury debt, attracts investors due to the nation’s “safe-haven” status. Also, U.S. yields are elevated by our ballooning federal debt and uncertainties related to trade policy. Economic growth is also somewhat stronger in the U.S., which tends to elevate yields.

These factors give the Fed reason to be cautious about cutting its target rate. It needs evidence that inflation will continue to trend down, and that policy uncertainties can be resolved without reigniting inflation.

Euro Area: The European Central Bank’s (ECB) refinancing rate is now 2.15%. Meanwhile, the 10-year German Bund is yielding around 2.6%, so both short-term and long-term rates in the Euro area are lower than in the U.S. In this case, the difference relative to U.S. rates is not large, nor is it likely attributable to lower expected inflation. Instead, sluggish growth in the EU helps explain the gap. Federal deficits and the ongoing issuance of new Treasury debt also keep U.S. yields higher. Treasury yields may also reflect a premium for volatility due to heavier reliance on foreign investors and private funds, who tend to be price sensitive.

Japan: The Bank of Japan’s (BOJ) policy rate is currently 0.5%. Yields on Japanese 10-year government bonds have recently traded just below 1.5%. Expected inflation in Japan has been around 2.5% this year, which means that real yields are sharply negative. The BOJ has tightened policy to bring inflation down. The nearly 3% gap between U.S. and Japanese bond yields reflects very weak economic growth in Japan. In addition, despite a very high debt to GDP ratio, the depressed value of the yen discourages investment abroad, helping to sustain heavy domestic holdings of government debt.

Blame and Backfire

Trump might well understand the limits of the Fed’s control over interest rates, but if he does, then this is exclusively a case of scapegoating. Cross-country differences in interest rates represent equilibria that balance an array of complex conditions. These range from disparate rates of inflation, the strength of economic growth, currency values, fiscal imbalances, and the character of the investor base. .

Investor expectations obviously play a huge role in all this. A central bank like the Fed cannot dictate long-term yields, and it can do much more harm than good by attempting to push the market where it does not want to go. That type of aggressiveness can spark changes in expectations that undermine policy objectives. It’s childish and destructive to insist that interest rates can and should be as low in the U.S. as in countries facing much different circumstances.

The Mystery of the “Missing” Tariff Inflation

03 Thursday Jul 2025

Posted by in Inflation, Tariffs

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Seemingly everyone wants to know: where is this tariff inflation you economists speak of? Even my pool guy asked me! We haven’t seen it yet, despite the substantial tariffs imposed by the Trump Administration. The press has been wondering about this for almost two months, and some of the MAGA faithful are celebrating the resounding success of the tariffs in this and other respects. Not so fast, grasshoppers!

There are a couple of aspects to the question of tariff inflation. One has to do with the meaning of inflation itself. Strictly speaking, inflation is a continuing positive rate of increase in the price level. Certain purists say it is a continuous positive rate of increase in the money supply, which I grant is least a step beyond what most people understand as inflation. Rising prices over any duration is a good enough definition for now, but I’ll return to this question below in the context of tariffs.

There is near-unanimity among economists that higher tariffs will increase the prices of imports, import-competing goods, and goods requiring imported materials as inputs. Domestic importers pay the tariffs, so they face pressure on their profit margins unless they can pass the cost onto their customers. But so far, since Donald Trump made his “Liberation Day” tariff announcement, we’ve seen very little price pressure. What explains this stability, and will it last?

Several factors have limited the price response to tariffs thus far:

— Some importers are “eating” the tariffs themselves, at least for now, and they might continue to pay a share of the tariffs with smaller margins.

— Cargo moves slowly: According to Neil Kashkari of the Minneapolis Fed:

“… cargo loaded onto ships in Asia on April 4 was not subject to the reciprocal tariffs, while cargo loaded April 5 was. Cargo coming from Asia can take up to 45 days to make it to U.S. ports and then must be transported to distribution centers and then on to customers. It is possible that goods from Asia subjected to high tariffs are only now making their way to customers. These two factors suggest the economic effects of increased tariffs could merely be delayed.“

— Data on prices is reported with a lag. We won’t know the June CPI and PPI until July 15, and the PCE price index (and its core measure, of most importance to the Fed) won’t be reported until July 31, and will be subject to revisions in subsequent months.

— Importers stocked up on inventories before tariffs took effect, and even before Trump took office. Once these are depleted, new supplies will carry a higher cost. That’s likely over the next few months.

— Uncertainty about the magnitude of the new tariffs. Trump has zig-zagged a number of times on the tariff rates he’ll impose on various countries, and real trade agreements have been slow in coming. This makes planning difficult. Nevertheless, inventories are likely to carry a higher replacement cost, but adjusting price creates a danger of putting oneself at a competitive disadvantage and alienating customers. Many businesses would prefer to wait for a clearer read on the situation before committing to a substantial price hike.

— Tariff exemptions have reduced the average tariffs assessed thus far to about 10%, well below the 15% official average. This will reduce the impact on prices and margins, but it is still a huge increase in tariffs and another source of uncertainty that should give importers pause in any effort to recoup tariffs by repricing.

— Importers are storing goods in “bonded warehouse“ to delay the payment of tariffs. This helps importers buy time before committing to pricing decisions.

— Kashkari notes that businesses can find ways to alter trade routes so as to lower the tariffs they pay. For example, he says some goods are being routed to take advantage of the relatively favorable terms of the free trade agreement between the U.S., Mexico, and Canada.

So it’s still too early to have seen much evidence of price pressure from Trump’s tariffs. However, that pressure is likely to become more obvious over the summer months. The expectation that tariffs should have already shown up in prices is just one of several errors of those critical of the Federal Reserve’s patience in easing policy.

Is there a sound reason to expect higher tariffs to produce a continuing inflation? Or instead, should we expect a “one-time” increase in the price level without further complications? Tariffs could generate an ongoing inflation if accompanied by an increase in the rate of money growth, or at least enough money growth to create expectations of higher inflation. Thus, if the Federal Reserve seeks to “accommodate” tariffs by easing monetary policy, that might lead to more widespread inflation. That could be difficult to rein-in, to the extent that higher inflation gets embedded into expectations.

Tariffs are excise taxes, and while they put upward pressure on the prices of imports and import-competing goods, they may have a contractionary effect on economic activity. Tighter budgets might lead to softer prices in other sectors of the economy and moderate the impact of tariffs on the overall price level.

The Fed’s reluctance to ease policy has been reinforced by another development. It’s usually argued that tariffs will strengthen the domestic currency due to the induced reduction in demand for foreign goods (and thus the need for foreign currency). Instead, the dollar has declined more than 9% against the Euro since “Liberation Day”, and the overall U.S. dollar index experienced its steepest first-half decline in 50 years. A lower dollar stimulates exports and depresses imports, but it also can lead to “imported” inflation (in this case, apart from the direct impact of tariffs). Uncertainty regarding tariffs deserves some of the blame for the dollar sell-off, but the fiscal outlook and rising debt levels have also done their part.

The upshot is that Trump’s tariffs are likely to cause a one-time increase in the price level with possibly a mild contractionary effect on the real economy. So it’s a somewhat stagflationary effect. It won’t be disastrous, but the tariffs can be made more inflationary than they “need be”. That’s why Trump is foolish to persist in haranguing the Fed for not rushing to ease policy.