The China Trade Deal Doesn’t Solve the Fed’s Problems
The central bank can’t rescue the economy quickly with the White House pursuing inflationary trade policies.
What breakthrough?
Photographer: Fabrice Coffrini/AFP/Getty ImagesThe agreement between the US and China to roll back their respective tariffs for 90 days has led to renewed optimism that the worst of America’s trade wars is over. I’m not seeing the “breakthrough”: There’s still plenty of scope for economic damage that the Federal Reserve will struggle to contain.
First, the rollback might not last and doesn’t change the broad contours of the story. Tariffs will still be high, fueling inflation and stunting growth. The Yale Budget Lab estimates that the average effective tariff rate will be 17.8%, up from about 2.5% when President Trump started his second term. That’s enough to increase the price level and the unemployment rate by about 1.7 and 0.35 percentage points, respectively.