Tariffs Haven’t Spurred Inflation—Yet Fed Wonders Why

John Williams, president of the New York Federal Reserve, has indicated that current data does not show significant evidence of inflationary pressure caused by the Trump administration's increased tariffs on imported goods. During a speech at the Economic Club of New York, Williams stated that he has not observed "signs of amplification or second-round effects of tariffs on broader inflation trends," emphasizing that the effects of tariffs on inflation remain at or below expected levels [1]. His remarks suggest that the Federal Reserve is currently not seeing a substantial inflationary impact from the tariff policy, despite the ongoing legal challenges and economic uncertainties surrounding the measures.

Williams further elaborated on the inflationary risks associated with tariffs, noting a reduction in upside risks due to the actual price pressures being less than initially estimated [2]. He acknowledged that the tariffs "definitely" influence price pressures but clarified that the inflationary pass-through effects are within or below expectations. This cautious optimism reflects the central bank's ongoing evaluation of how trade policies interact with monetary policy in shaping economic outcomes. The New York Fed president also emphasized the importance of time in assessing the full impact of these tariffs on inflation, as the long-term effects may not yet be fully visible.

Meanwhile, the Trump administration's legal battle over the legality of its tariffs has created uncertainty for the broader economy and financial markets. The administration has filed an appeal with the U.S. Supreme Court, requesting an expedited hearing in a bid to uphold the tariffs, which a federal appeals court recently ruled to be partially illegal. Trump has warned that a loss in the case could lead to the unraveling of key trade agreements with countries such as the European Union, Japan, and South Korea [3]. This potential reconfiguration of trade relationships raises concerns about the stability of global supply chains and the broader economic implications of prolonged trade tensions.

The financial markets have already begun to react to this uncertainty, with the U.S. dollar weakening following recent tariff announcements. Economic research, including a recent study by Ostry et al. (2025), highlights that the depreciation of the dollar has been influenced by the anticipation of retaliatory responses from trade partners. In cases where the U.S. imposes tariffs without facing foreign retaliation, the dollar tends to strengthen. However, when retaliation is expected or occurs, the dollar weakens, as seen in the 2025 "Liberation Day" tariff announcements [4]. This dynamic aligns with theoretical models that suggest the exchange rate impact of tariffs depends heavily on the context of global trade responses.

Domestically, the Federal Reserve's latest Beige Book report, compiled from anecdotal data across the U.S., underscores the growing strain on households and businesses due to rising tariff costs [5]. Consumers are adjusting their behavior by reducing non-essential spending and delaying large purchases, while businesses are freezing hiring and delaying expansion plans in response to weaker demand. These developments contribute to broader concerns about a slowing economy and a softening labor market, factors that may influence the Federal Reserve’s decision on whether to cut interest rates in the coming months. The report indicates that seven of the Fed’s twelve districts have reported firms hesitating to hire due to economic uncertainty, reinforcing the possibility of a rate cut in September.

The interplay between tariffs and inflation remains a focal point for both policymakers and market participants. While Williams has not observed a direct inflationary surge from tariffs, the Beige Book highlights the potential for continued price pressures in the future [5]. This suggests that the inflationary effects of tariffs may be more gradual and prolonged rather than immediate and acute. The Federal Reserve is likely to continue monitoring this dynamic as it weighs the trade-offs between inflation control and supporting economic growth in the face of external trade shocks.

As legal and economic uncertainties persist, the market's attention will remain on the Supreme Court's potential ruling on the tariffs, as well as the Federal Reserve's policy decisions. These developments will play a critical role in shaping the trajectory of inflation, employment, and global trade relations in the coming months.

Source:

[1] Fed's Williams says tariffs are not amplifying inflation (https://www.marketwatch.com/story/feds-williams-says-tariffs-are-not-amplifying-inflation-keeping-door-open-for-possible-rate-cut-in-september-86a44258)

[2] Fed's Williams sees reduced upside inflation risk from tariffs (https://finance.yahoo.com/news/fed-williams-sees-reduced-upside-184744030.html)

[3] Trump files appeal to Supreme Court, says US may 'unwind' trade deals (https://finance.yahoo.com/news/live/trump-tariffs-live-updates-trump-files-appeal-to-supreme-court-says-us-may-unwind-deals-if-it-loses-case-175804560.html)

[4] Tariffs and US dollar depreciations: Not so surprising after all (https://cepr.org/voxeu/columns/tariffs-and-us-dollar-depreciations-not-so-surprising-after-all)

[5] Rising Tariff Costs Squeeze Consumers, as Federal Reserve Notes (https://www.investopedia.com/beige-book-paints-picture-of-economy-squeezed-by-tariffs-11802913)