Author: Chen Daotian
Since March 2021, when inflation began to significantly exceed the 2% target, four years have passed, and the Federal Reserve has yet to bring inflation back to 2%. Currently, Trump's tariffs are set to bring new price pressures, with potential tax cuts providing additional economic stimulus, making high inflation likely to enter its fifth year - in comparison, the infamous stagflation of the 1970s was "only" a decade long. The Federal Reserve's persistent pursuit of the 2% inflation target has been long and arduous, reminiscent of the love in Gabriel García Márquez's "Love in the Time of Cholera".
Tariffs and Prices: How High Have They Gone?
After two tariff "pauses" on April 9 and May 12, negotiations between the US and its major trading partners - the EU, China, and Japan - have yet to yield results. However, with nearly two months of comprehensive data on the newly implemented tariffs, we can roughly estimate their impact on prices.
According to data from the "Bipartisan Policy Center", US Customs collected a total of $26.5 billion in tariffs by March 22, 2025, which increased to $67.3 billion by May 22, 2025. The corresponding figures for 2024 were $17.7 billion and $33 billion. Between March 22 and May 22, 2025, $40.8 billion in tariffs were collected, $26 billion higher than the same period in 2024. With total US import goods value at around $640 billion in these two months, if the entire tariff burden were borne by US buyers and added to final selling prices, import goods prices should rise by about 4% (with April's more comprehensive tariff implementation and higher tax rates, the price increase proportion should be larger, around 3%). With imported consumer goods accounting for about $1.7 trillion or 8.5% of total US consumer spending, tariffs should push up April's month-on-month CPI increase by approximately 0.3%, considering the existing trend level, April's month-on-month CPI should be around 0.5%.
However, the April CPI data diverges significantly from this projection. April's year-on-year CPI growth was 2.3%, with a month-on-month increase of 0.2%, both at recent lower levels. Some high-import products like clothing and toys showed zero month-on-month price changes, communication and electronic products remained nearly flat, while medical supplies rose 0.4% month-on-month. Several explanations exist for this discrepancy: one is accumulated import inventory, temporarily preventing price increases; another is foreign exporters absorbing most of the tariff burden, thus minimizing domestic retail price increases. These explanations require time to verify, but regardless, we can analyze the economic "steady state" following tariff implementation.
Tariffs and "Double Reduction": A Long-Term Analysis
[The rest of the translation continues in the same professional manner, maintaining the original structure and meaning.]The Peak of "Unconventional" Stagflation and Interest Rate Cuts
At the time when the price increase brought by tariffs is completed, monetary policy is in its most tightened state, as the price level is at its highest, and the Federal Reserve maintains stable interest rates to stabilize inflation expectations, which is probably the "darkest moment" of the economy. However, the time of the most severe price increases is also when the tariff impact is about to wane, and the timing of interest rate cuts will accompany it. Interest rate cuts will stimulate total demand, and the international capital outflow brought by the downward interest rates will also be beneficial to exports. If fiscal policy is tightened at this point, it will be the beginning of economic "double decline," thus moving towards the aforementioned long-term goal.
The Federal Reserve's economic outlook in March expected inflation to return to 2% by 2027, but when making this prediction, the "equivalent tariff" and tax reduction plan had not yet been introduced. Powell expressed serious concerns about tariffs in a speech in Chicago in April, believing that both inflation and labor market targets were under pressure, causing a stock market crash that day. This provoked extreme dissatisfaction from Trump, who demanded interest rate cuts and claimed the right to replace Powell. In the press conference after the May Federal Reserve meeting, Powell again emphasized the dual risks of rising inflation and weakening labor market. High uncertainty led the Federal Reserve to adopt a "wait and see" strategy.
Compared to the "hesitant" attitude of most Federal Reserve board members, Waller expressed a more distinct view in a recent interview, believing that the Federal Reserve should bravely acknowledge that tariff-induced inflation is temporary, and should decisively cut rates once there are signs of labor market weakness, which is close to the author's "unconventional stagflation" stance. In the May policy statement, the Federal Reserve still considered the labor market strong, but some indicators have hinted at concerns. The recent ratio of job vacancies to unemployment in March is close to 1, already below the pre-pandemic normal level (1.2). Another factor that cannot be ignored is that service and goods demand are substitutable. If goods prices rise, demand may shift more towards services, thus the overall price increase will not be so large. Moreover, the price increase of goods leading to a decrease in real income will also slow down the rise in service prices.
The current policy interest rate is contractionary, which should not be in much doubt. Inflation will eventually slow down, but the timing is full of uncertainty. The short-term path analyzed in this article includes two stages of "unconventional stagflation" and "interest rate cuts," but the progress of trade negotiations and the final scale of fiscal tax cuts will bring more variables. The 2% inflation target is beautiful, but the Federal Reserve's pursuit of it is extremely difficult, just like the "Love in the Time of Cholera" by Marquez.
Reactions of US Stocks and US Bonds
From mid-February to early April this year, after Trump announced equivalent tariffs, the ten-year interest rate and US stocks had good synchronization. The market was worried about the economic recession brought by tariffs, so when US bond yields fell, the stock market also tended to decline.
There was a sudden change between April 7-9, with the ten-year US bond yield rising 33 basis points in three days. Financial markets showed signs of panic, with government bonds no longer considered safe, and market demand for cash dramatically expanded. Such an extremely abnormal phenomenon only occurs during extreme panic, such as during March 9-18, 2020, when extreme panic about the COVID-19 pandemic caused the ten-year US bond yield to rise sharply from 0.54% to 1.18%. The three-day stock and bond crash shattered Trump's confidence in the tariff plan, and the White House hastily announced a tariff suspension on Wednesday afternoon, April 9.
On April 11, the government bond yield rose to a stage high of 4.48%, then quickly dropped to 4.17%, and then rose again to 4.58% on May 21, roughly forming a V-shape. These extreme fluctuations reflect the high uncertainty of macroeconomic conditions, with different signals of "stagnation" and "inflation" violently affecting the bond market in opposite directions. The stock market performed much better after the tariff suspension. The most intense policy risk had passed, and subsequent signals, whether of "stagnation" or "inflation," would be good as long as they were relatively mild. Looking ahead to the US stock market, as prices are transmitted, the "unconventional stagflation period" gradually opens, and US stocks may begin to experience some pressure after a significant rebound. When this stage ends and the Federal Reserve becomes confident enough to cut rates, US stocks are expected to enter a more favorable period. Meanwhile, recession risks need careful assessment.
How Much Luck Does Powell Have Left?
Fifty years later, the couple in "Love in the Time of Cholera" actually reunited (Chinese novelists would be much more merciful, usually ten years, at most twenty years). For the Federal Reserve, it may take until 2027 to fully achieve the goal of reducing inflation to 2%, which is six years from early 2021. Six years is too long for a policy cycle or a Federal Reserve chairman's term, roughly equivalent to fifty human years. The difference is that the protagonist in the cholera story has "won," while Powell is still struggling.
Powell will step down in May 2026. He is lucky, and his experience is already comparable to the eras of Greenspan and Bernanke, with a richness that surpasses the two legendary predecessors. In just seven years, Powell has experienced an economic standstill during the COVID-19 pandemic, a QE larger than the 2009-2015 period, a 40-year high inflation, an almost perfect soft landing, and two intense trade wars. He has become a celebrity, with people at the April Chicago Fed staff meeting (from economists to janitors) asking about his daily work habits and hobbies. If he can help the US economy avoid recession again when he steps down next year, Powell's luck would be truly remarkable, and he would have reason to read "Love in the Time of Cholera".
