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Tariffs, the Dollar, and the Fed | The Budget Lab at Yale

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A tariff imposed by the US is a tax that ultimately falls on American businesses and consumers, putting upward pressure on prices. But the mechanics and the magnitude of this effect are complicated and depend on several factors, especially the appreciation of the dollar and the response of the Federal Reserve. This brief note describes how these dynamics affect a tariff’s ultimate effect on prices. When the US imposes tariffs unilaterally—without retaliation from other countries—the US dollar strengthens. That’s because with tariffs in place, US consumers and businesses demand fewer imports, and so by extension demand less foreign currency (since foreign products are typically priced in another currency, which is necessary for buying them). Demand for the US dollar in contrast is less directly damaged, since in this scenario other countries are not retaliating with their own tariffs. US demand for foreign currencies declines while foreign demand for US dollars is unchanged. Another way

A tariff imposed by the US is a tax that ultimately falls on American businesses and consumers, putting upward pressure on prices. But the mechanics and the magnitude of this effect are complicated and depend on several factors, especially the appreciation of the dollar and the response of the Federal Reserve. This brief note describes how these dynamics affect a tariff’s ultimate effect on prices. When the US imposes tariffs unilaterally—without retaliation from other countries—the US dollar strengthens. That’s because with tariffs in place, US consumers and businesses demand fewer imports, a

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