Key Points

  • John Williams, President of the Federal Reserve Bank of New York, predicted that import tariffs effective in the United States on Tuesday (March 4) will relatively quickly push up prices of imported consumer goods, while price increases for American products made with imported intermediate goods will emerge more gradually.
  • Williams said: "Especially tariffs on consumer goods will pass through to import prices quite strongly and then filter into the prices consumers pay—this process happens relatively quickly." He added that tariffs on "intermediate inputs" tend to have a more gradual pass-through, and their effects may last somewhat longer.
  • Williams noted that the U.S. trade outlook is uncertain, including the duration of tariffs and how targeted countries will respond. In a Bloomberg webcast interview, he also emphasized that the U.S. "economy is starting from a good place," with unemployment at 4% and inflation about 0.5 percentage points above the Federal Reserve's 2% target.

In-Depth Analysis

Williams made these remarks just hours after U.S. President Donald Trump imposed 25% tariffs on imports from Canada and Mexico and raised tariffs on Chinese goods to 20%.

According to estimates from the Yale Budget Lab, Trump's executive orders have pushed the overall U.S. tariff rate to its highest level since 1943. The institution estimates that these import tariffs could raise prices by up to 1.2%—costing the average household between $1,600 and $2,000 per year—and could shave 0.6 percentage points off GDP growth this year.

Canadian Prime Minister Justin Trudeau said in a statement on Monday (March 3): "Let me be unequivocal—there is no justification for these actions." Trudeau said Canada will retaliate with 25% tariffs on $155 billion worth of U.S. goods, with tariffs on $30 billion taking effect immediately and the remaining $125 billion to be included after 21 days.

Mexican President Claudia Sheinbaum said at a press conference on Tuesday (March 4) that Mexico plans to announce countermeasures on Sunday, including tariffs and non-tariff actions.

The Yale Budget Lab said that if Trump maintains these tariffs, U.S. electronics, apparel, motor vehicles, and food industries will face greater price pressures than most other sectors.

The "trade war," as Trudeau called it, comes as recent data show U.S. consumer spending, manufacturing, and business investment have declined in recent months, while layoffs are rising modestly.

Williams said that among businesses and consumers, concerns about tariffs are "clearly affecting people's views on inflation this year." But he also noted that concerns about the long-term inflationary impact of tariffs are relatively moderate.

Both the Conference Board and the University of Michigan noted in recent reports on U.S. household economic outlook that tariff anxiety depressed consumer confidence last month.

These reports came after data released last Friday (February 28) by the U.S. Bureau of Economic Analysis showed consumer spending fell 0.5% in January, particularly in purchases of autos and other durable goods.

Tariff concerns also weighed on manufacturing activity last month. The Institute for Supply Management (ISM) said Monday (March 3) that its manufacturing activity index fell 0.6 percentage points from the previous month. Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said in a statement: "Demand weakened, production stabilized, and layoffs continued as panelists' companies experience their first operational shock from the new administration's tariff policy."

Dawn Fitzpatrick, Chief Investment Officer of Soros Fund Management, said at a Bloomberg event that the plunge in consumer and business sentiment is both sudden and severe. "Manufacturers will absorb price pressure, and then you can argue it's a one-time price move. But I think what you can't control is consumer confidence and business confidence," she said in an interview, adding, "And that's what's deteriorating sharply right now."

Investor confidence has also declined by some measures. The S&P 500 closed Tuesday (March 4) at 5,778.15, down 1.5% year-to-date and below its closing level on November 5, 2024, the day Trump won his second term.