Fed Says Tariffs Could Ease Inflation By Curbing Demand and Employment

• The 2025 tariff increase of 15% was the largest in the modern era, with the last comparable rates occurring between World War I and World War II
• Researchers Barnichon and Singh found that tariff shocks suppress demand through increased uncertainty, lowering consumer and investor confidence, which paradoxically reduces inflation while raising unemployment
• Nearly half of product leaders at goods-producing companies report tariffs are already impacting operations, forcing high-stakes decisions amid delayed economic data and an information vacuum

Summary

Key Findings:

New Federal Reserve research published January 5, 2026, challenges conventional economic theory regarding tariffs and inflation. Researchers Regis Barnichon and Aayush Singh examined the impact of the 15% increase in the average U.S. tariff rate in 2025—the largest in the modern era—finding that higher tariffs may actually lead to lower inflation and higher unemployment, contrary to traditional expectations.

Main Points:

The study analyzed historical data dating back to when tariff rates last exceeded 15%, during the period between World War I and World War II. While conventional theory suggests tariffs increase production costs and raise prices, leading to higher inflation, the Fed research indicates the opposite effect occurs.

Explanation:

Researchers attribute this phenomenon to uncertainty effects: tariff shocks coincide with uncertain economic environments that depress activity by reducing consumer and investor confidence, creating downward pressure on inflation. Additionally, adverse tariff shocks may reduce asset prices, dampening demand and lowering inflation while increasing unemployment.

Market Implications:

The research comes as middle-market companies face operational challenges, with nearly half of product leaders at goods-producing companies reporting tariffs are already impacting operations. These firms are making critical decisions amid an information vacuum, complicated by the federal government's cancellation of advance GDP estimates and delayed economic data releases.

Caveat:

Researchers cautioned that historical patterns may not accurately predict outcomes in 2026's economic environment, suggesting uncertainty remains regarding tariff impacts on monetary policy and economic performance.