The Trump administration has imposed sweeping tariffs on nearly 100 countries, sending U.S. import duties soaring to their highest levels in nearly a century. The new rates range from 10% to 15% for major economies like Japan and the EU, while nations such as Brazil and India face tariffs of up to 50%.
According to Yale’s Budget Lab, the average effective tariff rate has doubled to 18%, the highest since 1933. This increase will likely add to inflationary pressures, squeezing profit margins and leading to cost-cutting or layoffs.
Chief Economist Diane Swonk at KPMG warns that the tariffs could fuel stagflation, a combination of stagnant economic growth and high inflation. She expects inflation to rise above 3.5% by year-end and remain elevated due to the sequential nature of the tariffs.
The impact on the labor market is also concerning, with unemployment rates potentially rising if the Federal Reserve cuts interest rates too much. Swonk notes that a recession is possible, citing increasing shares of long-term unemployed individuals and stagnant job growth.
As the Fed prepares for its decision in September, Swonk forecasts two more rate cuts by year-end, but warns it’s a “hard and heavy lift” given worsening inflation numbers. The president’s recent nomination of Stephen Miran to fill a vacant seat on the Board of Governors adds uncertainty to the Fed’s dynamics, with some expecting him to dissent from rate cuts.
The escalating trade tensions and tariffs have created a toxic situation for the Federal Reserve, making its decision more complicated. With inflation threatening to rise and unemployment rates potentially increasing, the Fed must navigate this tightrope to preserve economic growth.
Source: https://www.pbs.org/newshour/show/as-trumps-tariffs-kick-in-economist-breaks-down-inflation-and-recession-warning-signs