Higher tariffs are often thought to present a problem to monetary policymakers at the Federal Reserve (Fed). Tariff shocks raise prices and reduce output and employment, which seems to push in opposite directions from the perspective of the Fed’s dual mandate to stabilize prices and maintain full employment, creating challenges for the Fed in crafting a response. Reflecting these concerns, the word “tariff” appears 36 times over 18 pages in the latest Minutes of the Federal Open Market Committee (FOMC). But the “problem” of tariffs for monetary policymakers has been well understood for quite some time, and solutions to this problem already exist both in the economics literature and in the practical toolkit that central bankers have been using for many years. In essence, the solution is to adjust measures of inflation to remove the effects of changes in tariffs and other tax rates or employ a policy target, such as nominal GDP growth, that obviates the need for making such an adjustment.
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