The potential for significant new tariffs under former President Donald Trump’s proposed economic policies could increase inflation and lead to higher U.S. interest rates, according to Tim Adams, CEO of the Institute of International Finance (IIF).
Speaking at the IMF Annual Meeting this week, Adams highlighted the economic risks of Trump’s suggested tariffs, which would include a 10% global tariff on all imports, with the possibility of increases on specific goods.
He pointed out that these tariffs could undermine the recent disinflation trend and create added pressure for the Federal Reserve to maintain or increase interest rates.
Adams explained, “The assumption is that with those tariffs, you’ll have higher inflation, and subsequently, higher interest rates than you would in the absence of those tariffs.”
Potential Economic Consequences
The proposed tariffs on imports across sectors are expected to balance the trade and boost the production of local products by some.
But general tariffs of this sort would push up the costs of consumer goods and production inputs – or in other words, lead to inflation – and thus increase borrowing costs across both businesses and consumers.
As far as Adams is concerned, the potential impact could extend to global supply chains and emerge as a cost increase for both American firms and buyers.
Effect on Interest Rates and on the Federal Reserve
Higher tariffs, as such, can be expected to alter the regime of inflation that currently faces the Federal Reserve.
In the last year, the Fed has directed most of its energy towards stabilizing inflation by slowly hiking interest rates. Once again if tariff-induced inflation begins, then the Fed will need to maintain high interest rates to rein in inflationary pressures, continuing high interest rates.
This would impact both consumer borrowing and corporate lending, potentially slowing down the economy further.
Adams underscored the risks, noting, “Higher tariffs could hinder the Fed’s efforts to stabilize inflation, making it harder to ease rates in the near future.”
Global Repercussions
The potential tariff policies may also impact international trade relations, especially with key U.S. trading partners like China, Canada, and the European Union.
While supporters argue that tariffs could create incentives for reshoring production to the U.S., opponents fear it could strain global trade relations and result in retaliatory tariffs.
If trading partners respond with tariffs of their own, U.S. exports could suffer, affecting industries that depend on international markets.
Balancing Protectionism and Economic Stability
The ones in support of the tariff policies by Trump affirm that these ideas would help bring back the manufacturing operations of the country while checking on foreign operations that compete with local industries.
Critics though counter argue that definitely the costs could be higher and this is something that American consumers and businesses would not be happy to bear. Still, in the economic discussion, the Fed shoulders the responsibility in the inflation and growth equations.
This has elicited a lot of interest amongst economists as well as policymakers since the United States has been in search of a way to balance the trade need without in the process causing inflation and or affecting economic growth.
As the political campaigns for the 2024 elections begin to heat up the debate on trade policy and its impact on the economy will arise.
