“This time, I do think the effects are going to be more spread out, and for that reason, more difficult to identify” compared with the tariffs enacted during Trump’s first term, said Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives. “More goods are affected. More companies are affected.”

Trump unveiled widespread levies yesterday, including a 10 percent tariff on all exporters to the United States. Many countries—including China, the European Union, and Japan—face much higher rates. The announcement was harsher than many economists were anticipating, and it follows tariffs Trump had already ordered on steel, aluminum, and autos. Fed policymakers will parse incoming data for the direct and indirect impacts of those tariffs, including the extent of pass-through to consumers, the breadth of price hikes, and Americans’ expectations around future inflation.

Last month, Powell said the base case was that any inflationary boost from tariffs would likely prove transitory. If the Fed gauges that incorrectly, the central bank risks once again falling behind the curve on taming inflation. But if the economy weakens and officials don’t step in soon enough, the Fed risks letting the U.S. slipping into recession.

At a basic level, Fed officials will look to see how price changes stack up against the imports subject to tariffs, said William English, a professor at the Yale School of Management and a former division director at the Fed’s Board of Governors. “To the extent they’re out of alignment, you’d say, ‘Well, maybe something else is going on,’” English said.

Direct vs. Indirect Effects

The direct effect of tariffs on the prices for many everyday goods will likely be obvious in the consumer price index (CPI), said Inflation Insights’ Omair Sharif. Prime examples are electronics, shoes, and household furnishings, all of which the U.S. imports heavily from China, he said.

Dissecting how duties on intermediate goods, like steel and aluminum, impact prices will be less straightforward, he added. Although details in the producer price index (PPI) can help, cost increases for such goods are often absorbed—at least to some extent—in margins along the production pipeline. Direct effects, which may ultimately serve as a one-time price increase, are the type of thing officials appear willing to “look through.” But indirect effects on non-imported goods and services could have a more persistent impact on inflation, said St. Louis Fed President Alberto Musalem.

Musalem’s staff estimated that a 10 percent increase in the effective U.S. tariff rate—roughly in line with the levies announced prior to yesterday’s address—could increase the Fed’s preferred gauge of inflation by as much as 1.2 percentage points. More than half of that estimate reflects indirect effects. “I would be wary of assuming that the impact of tariff increases on inflation will be entirely temporary, or that a full ‘look-through’ strategy will necessarily be appropriate,” Musalem said on March 26. He noted, however, that the estimated impact is proportional. Larger tariffs, like the ones announced, would suggest a much larger effect.

Bloomberg Economics estimates that the average U.S. tariff rate has now climbed to about 22 percent, from 2.3 percent last year, which would nearly double the inflation impact presented by Musalem’s staff.

A prolonged trade war risks spurring sticky goods inflation and would make it harder for the Fed to shake off the tariffs, said Josh Hirt, senior U.S. economist at Vanguard. The longer goods inflation lasts, he added, the more concerned he’d be about price pressures spreading more broadly. “You do, in that scenario, risk the fact that it does start to bleed over into services a little bit more, bleed more into wages and then also inflation expectations a little bit more too,” Hirt said.

Inflation Expectations

Speaking in a recent interview with Bloomberg News, Atlanta Fed President Raphael Bostic said he’ll not only be eyeing the extent of pass-through to consumers, but also Americans’ response to tariffs and their inflation expectations.

Recent survey data shows uncertainty over tariffs is weighing on consumers’ perception of the economy and pushing them to raise their expectations for short- and long-term inflation, a potentially troubling development for the Fed. Furthermore, it’s not clear how many more price hikes Americans will tolerate before pulling back on spending.

Such factors could influence how companies strategize around passing on price increases to consumers, analysts said, further complicating any assessment of the tariffs’ impact.

“They’re going to be trying various mitigation strategies,” Rosner-Warburton said. “We’re coming after a big inflation shock from the pandemic, so you could see more pre-emptive behavior, potentially. You could see it spill into other industries that aren’t directly impacted by the tariffs. It just could be more muddled this time.”

Powell has said Fed staff are modeling a range of possible outcomes from tariffs, which generally assume full retaliation from U.S. trading partners. He added that he expects the central bank to ultimately have a trusted forecast, but it’s “hard to say when that will be.”

Anna Wong from Bloomberg Economics underscored that statistical models are not always a sufficient guide, since they are broadly based on how things played out in the past. She pointed to the models that suggested Covid-era inflation would prove transitory. In the end, she urged policymakers to also use their own judgment. “In 2022, what they thought was the noise was actually the signal,” she said.

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