Source: EconLog
by Scott Sumner
“The current level of tariffs, by itself, is probably not enough to trigger a recession. Nonetheless, a recession is possible due to the interaction of tariffs and monetary policy. Put simply, the trade war will reduce the equilibrium or natural rate of interest, likely making monetary policy tighter in 2025. I would recommend rate cuts if not for the fact that previous monetary policy has been too expansionary and inflation remains a significant problem. … The administration faces an interesting dilemma. It can avoid recession by backing off on the trade war, at the cost of failing to address the trade deficit. Or it can press ahead with a more aggressive trade war, at the cost of risking recession. Recessions usually reduce the trade deficit.” (04/30/25)