The Federal Reserve is expected to keep interest rates steady during its meeting on May 7, 2025.

This decision comes amid uncertainty surrounding the US economy due to recent tariff policies.

The Fed has maintained its policy rate in the 4.25%-4.50% range since December 2024.

🔗 Source: Reuters

🧠 Food for thought

1️⃣ Historical lessons from past tariff wars offer cautionary signals

Today’s tariff situation has concerning parallels to the protectionist era of the 1920s-30s, when similar policies devastated international trade.

The Smoot-Hawley Tariff Act of 1930 raised duties on over 20,000 imported goods, contributing to a massive contraction in global commerce. U.S. imports from Europe plummeted from $1.3 billion in 1929 to just $390 million by 1932, while exports fell from $2.3 billion to $784 million 1.

World trade overall contracted by approximately 66% between 1929 and 1934, as countries engaged in retaliatory “beggar-thy-neighbor” policies that deepened the Great Depression 1.

Economic history suggests trade barriers rarely deliver their promised benefits, instead creating cascading market disruptions that monetary policy alone struggles to counterbalance.

2️⃣ Tariffs quickly ripple through domestic prices beyond directly targeted goods

Recent empirical evidence demonstrates how rapidly and extensively tariffs inflate consumer costs across multiple sectors.

When the U.S. imposed import tariffs on $283 billion of imports in 2018, the Consumer Price Index rose by an estimated 0.3% within months, while average import tariffs doubled from 1.6% to 3.3% 2.

Price increases manifested within just three months of tariff implementation, with both directly targeted goods and domestically produced alternatives seeing cost increases as U.S. manufacturers adjusted their pricing in response to higher-priced imports 2.

Even small tariff adjustments created measurable impacts. For example, a 10 percentage point increase in output tariffs raised the Producer Price Index by 1.5%, while a similar increase in input tariffs raised it by 2.3% 2.

This swift pass-through effect explains why the Federal Reserve is particularly concerned about tariffs potentially reigniting inflation just as they’ve made progress bringing it down.