San Francisco, CA – November 24, 2025 – A groundbreaking series of studies from the Federal Reserve Bank of San Francisco (FRBSF) has unveiled a counterintuitive and complex relationship between tariffs and inflation, challenging long-held economic assumptions. The research indicates that while tariffs can initially lead to a decrease in inflation, primarily by dampening aggregate demand, this effect is temporary, eventually giving way to a significant inflationary boost. This nuanced finding presents a formidable challenge for the Federal Reserve (FRBSF) in calibrating its monetary policy, requiring a delicate balance between addressing short-term disinflationary pressures and anticipating longer-term inflationary surges.

The implications for the global financial markets and the broader economy are profound. As central banks worldwide grapple with persistent inflation and the potential for increased protectionist trade policies, the FRBSB's findings underscore the need for a more sophisticated understanding of how trade barriers propagate through the economy. The study suggests that policymakers must exercise extreme caution, as misinterpreting the temporal effects of tariffs could lead to inappropriate monetary responses, potentially exacerbating economic instability.

Unpacking the Dual-Phase Impact of Tariffs

The core of the FRBSF's revelation stems from a working paper by Régis Barnichon and Aayush Singh, titled "What Is a Tariff Shock? Insights from 150 years of Tariff Policy." Their extensive historical analysis demonstrates that, immediately following the imposition of tariffs, economies tend to experience lower inflation, coupled with reduced economic activity and increased unemployment. This initial disinflationary phase is attributed to tariffs acting as an "aggregate demand shock" through two main channels:

• Uncertainty Channel: Tariffs introduce significant economic uncertainty, causing consumers and businesses to pull back on spending and investment. This contraction in demand naturally exerts downward pressure on prices.
• Wealth Channel: An adverse tariff shock can trigger declines in asset prices, such as stock values, diminishing household wealth and further depressing aggregate demand.

However, the studies meticulously detail a subsequent reversal. The initial disinflationary effect is transient, with inflation eventually surging. One FRBSF Economic Letter suggests that a 1% increase in tariffs leads to an initial decline of approximately 10 basis points in inflation, which then reverses to an increase of about 10 basis points per 1% tariff increase over the subsequent two years, gradually fading by the fourth year. This long-run inflationary impact aligns with traditional economic theory, where tariffs increase the cost of imported goods and production inputs, ultimately passing through to higher consumer prices as supply-side factors begin to dominate. The key players in this analysis are the FRBSF researchers, with the Federal Reserve (US: FED) standing as the primary stakeholder whose policy decisions are directly impacted.

Corporate Crossroads: Winners and Losers in a Tariff-Driven Economy

The dual impact of tariffs outlined by the FRBSF study creates a complex landscape for public companies (US: PUBCO). In the short term, the demand-dampening effects could hurt a wide array of businesses, particularly those reliant on consumer spending and investment. Companies heavily involved in international trade, such as multinational manufacturers and retailers, could face reduced sales volumes and increased inventory challenges as demand shrinks.

As the inflationary effects take hold in the longer run, companies reliant on imported raw materials or intermediate goods will likely face significant cost pressures. Manufacturers (US: MFG) in sectors like automotive, electronics, and apparel, which often have intricate global supply chains, could see their input costs rise substantially. This could compress profit margins, force price increases on consumers, or necessitate costly supply chain restructuring. Conversely, domestic producers in protected industries might see a temporary competitive advantage, though this could be offset by reduced overall demand and higher costs for any imported components they still require. The study also highlights that tariffs can disproportionately increase prices for investment goods—a 25% tariff, for instance, could raise investment prices by an estimated 9.5% compared to 2.2% for consumer prices. This means companies planning significant capital expenditures (CapEx) could face higher costs for machinery and technology, potentially delaying or scaling back expansion plans.

Broader Economic Ripple Effects and Policy Redefinitions

The FRBSF's findings inject new complexity into broader economic trends, particularly discussions around deglobalization and supply chain resilience. If tariffs become a more entrenched feature of global trade, the initial demand shock could contribute to slower economic growth, while the subsequent inflationary push could lead to a challenging stagflationary environment. This paradigm shift could accelerate efforts by companies to reshore production or diversify supply chains, potentially leading to higher domestic production costs but reduced exposure to international trade policy volatility.

For the Federal Reserve (US: FED), the study's implications are profound. It challenges the conventional wisdom that tariffs are solely and immediately inflationary, requiring the Fed to develop more sophisticated models to distinguish between demand-side and supply-side shocks. The timing of policy responses becomes paramount; an accommodative stance to counter initial disinflation and unemployment might prove counterproductive if the long-term inflationary effects are not adequately anticipated. Historically, central banks have often struggled with supply-side inflation, as monetary policy is primarily a demand-management tool. This study underscores the need for careful consideration of how trade policy interacts with monetary policy, potentially necessitating greater coordination between fiscal and monetary authorities. The analysis of 150 years of tariff policy in the study provides a historical lens, revealing that these dual effects are not unprecedented, though their modern context is unique.

Navigating the Future: Strategic Pivots and Market Challenges

Looking ahead, the dual-phase impact of tariffs suggests a period of heightened economic uncertainty and potential volatility. In the short term, markets may experience continued demand-side weakness, potentially leading to lower corporate earnings in sectors heavily exposed to consumer and business spending. However, investors will need to prepare for the eventual inflationary surge, which could erode purchasing power and necessitate adjustments in asset allocation strategies.

Companies, particularly those with global footprints, will need to consider strategic pivots. This could involve accelerating investments in automation and domestic production to mitigate tariff risks, or aggressively diversifying supply chains across multiple countries to reduce reliance on any single trade corridor. Market opportunities may emerge for companies that can innovate to reduce their reliance on imported inputs or those that specialize in reshoring solutions. Conversely, challenges will persist for businesses unable to adapt quickly, potentially leading to increased bankruptcies or consolidation in vulnerable sectors. A prolonged period of tariff use, as highlighted by the study, could lead to a "stop-go" economic cycle, where initial slowdowns are followed by inflationary pressures, making long-term planning exceptionally difficult for both businesses and policymakers.

A New Era of Trade-Informed Monetary Policy

The Federal Reserve Bank of San Francisco's study marks a pivotal moment in understanding the intricate dynamics between trade policy and macroeconomic stability. By revealing the dual, time-dependent impact of tariffs—initially disinflationary due to demand shocks, then inflationary due to supply-side cost increases—the research compels a re-evaluation of monetary policy frameworks. The key takeaway is the increased complexity for the Federal Reserve (US: FED) in achieving its dual mandate of maximum employment and price stability in an era of fluctuating trade policies.

Moving forward, investors and policymakers alike must closely monitor not only the implementation of new tariffs but also the timing of their economic effects. The market will likely become more sensitive to nuanced signals from central banks regarding their interpretation of these tariff-induced dynamics. Companies that demonstrate agility in adapting their supply chains and pricing strategies will be better positioned to weather these shifts. The lasting impact of this research will be a more sophisticated, albeit more challenging, approach to economic forecasting and policy formulation, emphasizing the critical interplay between global trade and domestic economic conditions. Investors should watch for Fed communications that explicitly address these dual tariff effects, any shifts in corporate supply chain strategies, and the evolution of global trade negotiations in the coming months.

This content is intended for informational purposes only and is not financial advice