FXTRADING Financial Focus (Asia-Pacific 02/11)Fed downplays tariff impact

Federal Reserve Governor Milan said at a recent public event that market concerns over the impact of tariffs have been significantly overstated over the past year. In practice, neither economic growth nor inflation has deteriorated as much as previously feared. He noted that, over time, a growing body of research and market observations has increasingly supported the view that tariffs have had a relatively limited impact on the overall macroeconomic environment.

On inflation, Milan pointed out that there is currently no evidence of sustained price pressure stemming from tariffs, with core inflation remaining broadly within a manageable range. Some Fed officials share a similar view, arguing that tariffs are more likely to cause a one-off price adjustment rather than push inflation into a new upward cycle. This suggests that, from a monetary policy perspective, tariffs have not altered the medium-term inflation outlook.

However, this assessment differs from a number of academic and institutional studies. Several analyses suggest that tariff costs have largely been passed on to U.S. consumers through higher goods prices. Estimates from the Yale Budget Lab indicate that the median implicit cost of tariff policies is about $1,400 per household per year. Such findings are widely cited by economists as direct evidence that the burden of tariffs is borne domestically and have become a key basis for market skepticism toward the policys effectiveness.

In response to this debate, Milan offered an alternative explanation. He argued that statistical treatment can be misleading. Many firms paying tariffs are registered in the United States but are actually subsidiaries of multinational corporations. From an ownership perspective, the profit pressure may ultimately be absorbed by overseas parent companies. Ignoring this ownership structure and attributing the burden solely based on the reporting entity could lead to significantly biased conclusions.

At the policy level, tariffs are also being given broader fiscal significance. Milan emphasized that tariff revenues have, to some extent, increased government income and helped alleviate the structural fiscal deficit. Given the current fiscal pressures facing the United States, this revenue source is increasingly viewed as a tool that complements industrial and trade policy rather than merely serving as leverage in trade negotiations.

At the same time, the U.S. Supreme Court is reviewing the legality of certain tariff measures, and any change in the ruling could lead to adjustments in the current trade framework. The Trump camp has previously warned that if these policies were overturned, the economic outlook and market confidence could be significantly affected. This institutional uncertainty has kept businesses cautious in their investment decisions and supply chain planning.

Milan also noted signs of marginal cooling in the labor market and suggested that current interest rates remain relatively high, leaving room for potential cuts. If employment continues to soften while tariff-related inflation pressures remain contained, the constraints on monetary policy would ease further. From the FXTRADING perspective, the tariff debate itself is having a diminishing direct impact on markets, while reflecting a broader shift in the U.S. policy mix toward fiscal expansion alongside gradual monetary easing. If the cooling trend in employment is confirmed and inflation does not rebound meaningfully due to tariffs, the medium-term case for a strong dollar may gradually weaken, with market focus shifting toward a reassessment between rate-cut expectations and slowing growth.