Dive Brief:

• U.S. tariffs enacted on Tuesday will likely boost prices for imported consumer goods fairly soon, while prices for U.S. manufactured products made with imported goods will rise more gradually, New York Federal Reserve Bank President John Williams predicted.
• “Tariffs on consumer goods, especially, they do feed into import prices pretty strongly — that does filter into prices consumers pay — that happens relatively soon,” Williams said. “Tariffs that feed into the kind of intermediate inputs,” he said, “tend to pass through more gradually and maybe last a little bit longer in terms of effects.”
• Williams noted uncertainty in the outlook for U.S. trade, including the duration of tariffs and how targeted countries will respond. Interviewed during a Bloomberg webcast, he also emphasized that the “economy is starting in a good place,” with unemployment at 4% and inflation about 0.5 percentage point above the Fed’s 2% target.

Dive Insight:

Williams spoke just hours after President Donald Trump imposed 25% tariffs on imports from Canada and Mexico, and raised duties on Chinese imports to 20%.

Trump’s order increased the U.S. tariff rate to the highest level since 1943, according to the Yale Budget Lab. The import duties will probably raise prices by as much as 1.2% — with an average annual cost per household ranging between $1,600 to $2,000 — and undercut gross domestic product growth this year by 0.6 percentage point, according to estimates by the Yale Budget Lab.

“Let me be unequivocally clear — there is no justification for these actions,” Canada Prime Minister Justin Trudeau said in a statement Monday.

Canada will retaliate by enacting 25% tariffs against $155 billion worth of U.S. goods, $30 billion of which would start immediately, Trudeau said. The remaining $125 billion of products will be subject to tariffs in 21 days.

Mexico plans to announce countermeasures on Sunday, including tariff and non-tariff actions, President Claudia Sheinbaum said in a press conference Tuesday.

If Trump sustains the tariffs, U.S. electronics, clothing, motor vehicle and food companies would suffer price increases higher than those of most other industries, the Yale Budget Lab said.

The start of what Trudeau called a “trade war” follows recent data indicating that U.S. consumer spending, manufacturing and business investment have fallen in recent months, while layoffs are inching up.

Among both businesses and consumers, concern about tariffs “is clearly influencing how people are thinking about inflation this year,” Williams said. Worries about the impact from import duties on long-term inflation are more muted, he said.

Anxiety about tariffs pushed down consumer sentiment last month, both the Conference Board and University of Michigan said in recent reports on the economic outlook among U.S. households.

The reports followed a 0.5% decline in consumer spending in January, especially on purchases of vehicles and other durable goods, the Bureau of Economic Analysis said Friday.

Concerns about tariffs also slowed manufacturing last month, the Institute for Supply Management said Monday, citing a 0.6 percentage point decline in its index of manufacturing activity.

“Demand eased, production stabilized and destaffing continued as panelists’ companies experience the first operational shock of the new administration's tariff policy,” Timothy Fiore, chair of the ISM manufacturing survey committee, said in a statement.

The slump in the mood of consumers and businesses is sudden and severe, Dawn Fitzpatrick, chief investment officer at Soros Fund Management, said at the Bloomberg event.

“Manufacturers will absorb the price pressure, and then you can argue that it’s a one-time price shift,” she said in an interview.

“But I think what you can’t control is consumer confidence and corporate confidence,” she said, adding “that is what is falling off a cliff right now.”

By some measures investor confidence has also fallen. The Standard & Poor’s 500 index closed Tuesday at 5778.15, down 1.5% this year and below the level at the end of trading on Nov. 5, 2024, the day Trump won a second term.