Investing.com -- Economist and former president of the Federal Reserve Bank of New York, Bill Dudley, has shared his opinion on the potential economic impact of the Trump administration’s tariff policies in a Bloomberg column. Dudley, who also served as vice-chairman of the Federal Open Market Committee, believes that markets are too complacent about the potential effects of these tariffs.
The tariffs imposed on Canada, China, and Mexico can impact both inflation and growth. As import prices rise, domestic producers may increase their prices, which can affect consumer spending. Additionally, the uncertainty regarding the level and longevity of tariffs, as well as possible retaliation, could lead businesses to postpone hiring and investment decisions.
Dudley noted that markets currently appear to believe that the growth effect will prevail. This belief is demonstrated by the recent sharp fall in stocks and the increased expectations of the Federal Reserve cutting rates, indicating that markets do not expect tariff-induced price increases to limit the central bank.
However, Dudley highlights two important factors that make this scenario incomplete. Firstly, he suggests that the growth slowdown won’t create as much slack in the labor market or downward pressure on wages as expected. This is due to the decline in illegal immigration, the Trump administration’s plans to significantly increase deportations, and the slow growth of the native-born prime-age labor force. As a result, monthly job gains of approximately 50,000 should be sufficient to keep the unemployment rate stable, compared to the 150,000 to 200,000 required in previous years.
Secondly, Dudley points out that if tariff-related price increases drive up inflation expectations, it will be difficult for the Federal Reserve to ignore them. This was not an issue during Trump’s first term when his policies were less extreme and inflation was below the Fed’s 2% target. However, the current magnitude of the tariff increases is significantly greater and could further delay the central bank’s goal of reducing inflation to its 2% target after years of exceeding this level.
As of February, respondents in the University of Michigan’s Surveys of Consumers expected inflation to average 3.5% over the next five to ten years, the highest level since 1995. This combination of lower growth potential, higher prices, and greater inflation expectations may negatively impact markets.
Dudley concludes by stating that he expects this less favorable outlook to be reflected in the Federal Reserve’s upcoming economic projections, which will be released after the next week’s monetary policy meeting. He anticipates that forecasts for output growth will be lowered and those for inflation will be increased. However, the path of the unemployment rate is not expected to change significantly as labor-force growth slows along with hiring. The median forecast for two 25-basis-point rate cuts in 2025 will likely remain, with many officials needing to change their minds to shift the median to just one rate cut. This seems unlikely given the current climate of uncertainty and political sensitivity.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.