How might central banks react to Trump’s new tariffs?
Increased tariffs raise prices in the country that imposes them, and reduces economic activity in the country they target. That is about as much as central banks around the world can be certain of as they respond to President Trump’s new duties on imports to the U.S., which threaten to rewire the global economy in unpredictable ways. Higher U.S. tariffs will weaken export-related activity in the targeted countries, and are therefore likely to cool inflation over time. Secondly, the boost to inflation in the U.S. from higher tariffs would likely mean the Fed keeps interest rates higher than otherwise, boosting the returns to holders of dollar assets. Central banks around the world have had a long time to think about the impact of higher tariffs, and many have published analyses of the potential impact that emphasize how much depends on the particular way the key factors interact, as well as the precise details of the new tariffs.
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