Increasing US tariffs are protectionist and escalatory.

The ratcheting up of tariffs and the Fed’s discretionary conduct of monetary policy are a toxic mix for economic performance. Escalating tariffs and President Trump’s erratic and unpredictable trade policy and threats are harming global economic performance, distorting monetary policy, and undermining the Fed’s credibility and independence.

President Trump’s objectives to force China to open access to its markets for international trade, reduce capital controls, modify unfair treatment of intellectual property, and address cybersecurity issues and other U.S. national security issues are laudable goals with sizable benefits. However, the costs of escalating tariffs are mounting, and the tactic of relying exclusively on barriers to trade and protectionism is misguided and potentially dangerous.

The economic costs to the United States so far have been relatively modest, dampening exports, industrial production, and business investment. However, the tariffs and policy uncertainties have had a significantly larger impact on China, accentuating its structural economic slowdown, and are disrupting and distorting global supply chains. This is harming other nations that have significant exposure to international trade and investment overseas, particularly Japan, South Korea, and Germany. As a result, global trade volumes and industrial production are falling. Weaker global growth is reflected in a combination of a reduction in aggregate demand and constraints on aggregate supply.

The Federal Reserve has achieved its dual mandate, yet it has resumed monetary easing, cutting its policy rate in July, September, and October in response to perceived downside risks associated with trade policy uncertainties. Combined with President Trump’s inappropriate public pressure on the Fed to cut rates, the Fed’s heightened focus on uncertainties and diminished reliance on data dependence increases the risks of a policy mistake that may undercut its public credibility and independence. The rate cuts will have little if any impact in offsetting the negative supply constraints of the tariffs and policy uncertainties on investment and productive capacity. However, by reducing the buffer from the zero lower bound (ZLB), they reduce the Fed’s flexibility to implement effective countercyclical policy in response to a future economic downturn.

The history of tariffs and the ebbs and flows of globalization provide critical lessons and caution about the significant downside risks of the current thrust of U.S. trade policies. The recent era of globalization may have already begun to fade, and the current reemergence of tariffs—imposed primarily by the United States, but also other nations—and tighter immigration laws are accentuating this drift toward protectionism.

In the face of an escalation of trade barriers, the Fed must continue to pursue its dual mandate but not extend monetary policy beyond its capabilities. The Fed should make clear that escalating trade barriers and policy uncertainties that impose supply constraints on productive capacity and distort global supply and distribution channels are beyond the scope of monetary policy to remedy. It must also emphasize the importance of it being independent to conduct policy without political interference or pressure and should rebuff inappropriate pressures from the administration while maintaining its politically neutral stance.