Trump Pushes Tariffs to Highest Since 1930s — and World Economy Shrugs

Good Tuesday evening. Here's what we're watching as we await tomorrow's economic data and Federal Reserve decision on interest rates.

Trump Pushes Tariffs to Highest Since 1930s - and World Economy Shrugs

With the U.S. and the European Union agreeing to a trade framework that includes a 15% tariff on goods imported from the EU, American consumers now face an overall effective tariff rate of 18.2%, the highest level since 1934, according to a new analysis by the Yale Budget Lab.

Over time, as importers seek to lower costs by switching to lower-tariff sources, the overall effective tariff rate is projected to fall to 17.3% - which would still be the highest since 1935.

The analysts at Yale estimated that in the short run, the tariffs will reduce household purchasing power by $2,400 a year on average. Over time, that loss settles at about $2,000 per household. The loss of purchasing power occurs through higher prices, with shoes costing 39% more and apparel costing 37% more in the short run, and 18% and 17% more in the long run, respectively.

The tariffs take a bite out of the overall economy, too, with gross domestic product growth registering 0.5 percentage points lower in 2025 and 2026. Over time, the U.S. economy is consistently 0.4 percentage points smaller. Unemployment rises by 0.7 percentage points by the end of next year.

The tariffs produce considerable revenues, though. The Yale researchers estimate that over the 10 years between 2026 and 2035, the tariffs will raise $2.7 trillion. That significant domestic tax has negative dynamic effects, however, and the total expected revenue falls to $2.3 trillion when factoring in the economic feedback effects.

Global economy shrugs it off: For all the potential problems implied by a simmering trade war, many economists are relieved that the tariffs President Donald Trump is imposing on trading partners around the world are not as high as had been threatened. After panicking during the initial announcement of Trump's new tariff regime in April, many analysts and investors have begun to make their peace with the import taxes, calculating that the global economy can absorb them without too much damage, especially at the more moderate levels now in play.

The International Monetary Fund provided fresh data to support that view Tuesday as it raised its global growth forecast to 3% this year and 3.1% in 2026. In April, the IMF said it expected "a significant slowdown" due to Trump's trade war and lowered its growth projections to 2.8% for 2025 and 3.0% for 2026.

The IMF also raised its outlook for the U.S., increasing its projected growth rate for 2025 by a tenth of a percentage point, to 1.9%, and three-tenths of a point for 2026, to 2.0%.

The latest estimates are a clear improvement over the forecast provided in April, but they remain below the results and projections recorded last year, before Trump's trade war injected added uncertainty into the global economy.

Outlook mixed: The costs of Trump's tariff hikes have been lower than expected, the IMF said, and better financial conditions, along with an increase in government spending, have boosted local and global economies. At the same time, the IMF warned that the costs of the tariffs are not zero, and things could still take a turn for the worse.

"This resilience is welcome, but it is also tenuous," said IMF Chief Economist Pierre-Olivier Gourinchas. "While the trade shock could turn out to be less severe than initially feared, it is still sizable, and evidence is mounting that it is hurting the global economy."

Some economists have a gloomier outlook. Analysts at Goldman Sachs warned last week that the global economy is reaching "stall speed." The analysts expect to see more turbulence in the economy in the months ahead, as companies exhaust the inventories they built up ahead of the tariffs and start replacing them with higher-priced imported goods.

So far, those inventories appear to have played a major role in limiting the negative effects of the tariffs. Once inventories are run down and pricing pressure becomes unavoidable, there is the possibility that price increases could be dispersed throughout the economic chain, limiting damage. For example, one clothing retailer in Indiana told NPR that he hopes the tariff on Chinese imports will be absorbed more or less evenly by manufacturers, wholesalers, retailers and shoppers.

"If you take 30% and cut that into five or six," the retailer said, "now suddenly it's not quite as dramatic."

The bottom line: Trump's tariffs have been less painful than initially feared, but that could change later this year as their full effects play out in the U.S. and global economies.

Fed Watchers Await Powell Signals About September

Despite intense pressure from President Trump to cut interest rates, Federal Reserve policymakers are expected to keep rates unchanged when they conclude a two-day meeting tomorrow. But Fed officials are divided on rate policy, and the meeting is also expected to produce a rare public display of divisions among the central bankers.

"Two Fed governors, Christopher Waller and Michelle Bowman, have signaled that they could dissent this week, preferring to cut rates right away," The Wall Street Journal's Nick Timiraos reports. "Such dissents will likely generate headlines because it has been five years since any rate-setting meeting had more than one dissent. But those dissents will underscore-rather than challenge-the prevailing caution among most Fed officials about moving too quickly."

Timiraos notes that Fed officials are divided into roughly three camps on the outlook for rate cuts. A group of centrists waiting to see more data on the strength of the economy and the potential for inflation might be ready to signal a September rate cut. But they are flanked on one side by governors ready to cut rates now and on the other side by officials concerned that inflation could still rise due to Trump's tariffs, necessitating more caution before signaling a rate cut. "What is dividing colleagues right now reflects differences in risk management-how much weight to give the possibility of moving too early versus too late, and which type of mistake would be harder to fix," Timiraos writes.

While that debate goes on, the pressure from Trump and his allies has only ratcheted higher - though, as Colby Smith of The New York Times reports, that effort to strong-arm Fed Chair Jerome Powell may be counterproductive, as it might lead the Fed to wait longer before cutting.

"The irony is that the administration is shifting the odds against it that the Fed will move in a manner that accords with what it wants," David Wilcox, a senior fellow at the Peterson Institute for International Economics and a former leader of the Fed's research and statistics division, told the Times. "A Fed that is attuned to guarding its independence will want the case for cutting to be just a little clearer and a little more unambiguous than if the administration had remained silent."

The bottom line: From the White House to Wall Street, Fed watchers will be looking for signals that a September rate cut is coming and for indications of how the Fed sees Trump's tariffs playing out.

Quote of the Day

"The money did not make a difference."

− Greg J. Duncan, an economist at the University of California, Irvine, as quoted in The New York Times about the surprising results of a study he helped lead that found that monthly cash payments to low-income families meant to help disadvantaged children did not produce the expected benefits.

"After four years of payments, children whose parents received $333 a month from the experiment fared no better than similar children without that help," writes Times reporter Jason DeParle. "The findings could weaken the case for turning the child tax credit into an income guarantee, as the Democrats did briefly four years ago in a pandemic-era effort to fight child poverty."

Some of the researchers behind the study reportedly believe that the Covid-19 pandemic and the emergency aid Congress provided because of it may have skewed the results. Or it could be that the results change as the children age - or that larger payments like those proposed by Democrats might be more effective. For now, though, the results provide conservative critics of income guarantees new ammunition in arguing against cash aid.

Fiscal News Roundup

• US, China Agree to Continue Talks on a Tariff Truce Extension – Bloomberg
• Lutnick Says More 'Horse Trading' Ahead With EU on Pact Details – Bloomberg
• Trump's Trade Deals for 'the World' Will Be 'Done by Friday,' but China Will Take Longer: Lutnick – CNBC
• Trump Threatens India With Tariffs as High as 25% – CNN
• Procter & Gamble to Increase US Prices to Counter $1bn Tariff Costs – Financial Times
• Stellantis Warns of $1.7 Billion Earnings Hit From Tariffs – CBS News
• Global Economy Is Weathering Trump's Tariff Assault, IMF Says – Washington Post
• The Fed Is Unlikely to Cut Rates, but This Week's Meeting Is Packed With Intrigue – CNBC
• Powell Under Siege as Fed Plans to Stand Pat on Rate Cuts – New York Times
• EPA Moves to End Climate Regulation Under Clean Air Act – Washington Post
• U.S. Exporters Get Welcome Surprise in Trump Tax Law – Wall Street Journal
• Trump Administration Weighs Patent System Overhaul to Raise Revenue – Wall Street Journal
• Trump Administration Freezes $108 Million for Duke Health After Accusing University of 'Systemic Racial Discrimination' – CNN

Views and Analysis

• Are Prices Going Up Because of Tariffs? Here's What We Know – Alina Selyukh, NPR
• Trump Is Winning His Trade War. What Will That Mean for the Economy? – Ana Swanson, New York Times
• Trump Got His Tariff Hike. The Rest Remains Murky – Daniel Desrochers, Ben Lefebvre and Doug Palmer, Politico
• Did the U.S. or the EU Emerge as the Winner in Trump Trade Deal? – Megan Cerullo, CBS News
• Trump's New Trade Order Is Fragile – Greg Ip, Wall Street Journal
• Who Pays for U.S. Tariffs, and Where Does the Money Go? – New York Times
• Tariffs on Medicines From Europe Stand to Cost Drugmakers Billions – Rebecca Robbins, New York Times
• Trump Tariffs Will Raise the Cost of Food for Americans – Alex Durante and Rebecca Walker, Tax Foundation
• The Interest Rate That Matters – Wall Street Journal Editorial Board
• The Republican Disaster Relief Disaster and the Democratic Path Forward – Bill Scher, Washington Monthly
• Which Public TV and Radio Stations Most Rely on Federal Funds – Alex Fitzpatrick and Erin Davis, Axios
• Homeownership Is Out of Reach for Too Many. Congress Can Change That – Ben Carson and Henry Cisneros, Washington Post
• Lawfully Present Immigrants Help Stabilize ACA Plans. Why Does the GOP Want Them Out? – Bernard J. Wolfson, KFF Health News
• Do 'Work Requirements' in Medicaid Work? Georgia's Been Trying It for Two Years – Jess Mador, NPR
• Air Farce One: When Gift Becomes Grift – Robert Kuttner, American Prospect
• What Is DOGE Without Elon Musk? – Cam Kettles and Gregory Korte, Bloomberg