In what may be the most contrarian economic research to emerge from the Federal Reserve system in years, economists at the San Francisco Fed have published findings that challenge a fundamental assumption about trade policy: that tariffs inevitably lead to higher prices.

The research, released Monday as part of the bank's Economic Letter series, suggests that the Trump administration's aggressive tariff increases—which pushed the average levy on U.S. imports to 17% from less than 3% at the end of 2024—may actually put downward pressure on inflation rather than stoking it.

150 Years of Data Tell a Different Story

Researchers Regis Barnichon and Aayush Singh drew on 150 years of empirical data from the United States, France, and the United Kingdom to reach their conclusions. Their analysis focused on two historical periods when tariff changes were "similar in speed and magnitude" to those implemented in 2025: the first wave of globalization from 1870 to 1913, and the turbulent interwar period.

"Our analysis of historical data highlights a possibility that the large tariff increase of 2025 could put upward pressure on unemployment while putting downward pressure on inflation."

— Regis Barnichon and Aayush Singh, San Francisco Federal Reserve

The finding flies in the face of standard economic models, which predict that tariffs—essentially taxes on imported goods—should flow through to higher consumer prices. So what explains the disconnect?

The Uncertainty Factor

The researchers point to uncertainty as a key mechanism. Large tariff increases don't just raise the cost of imports; they create a cloud of economic uncertainty that can depress overall demand across the economy.

When businesses face unpredictable trade conditions, they tend to pull back on investment and hiring. Consumers, sensing economic turbulence, may tighten their belts. The result can be a broader demand shock that puts downward pressure on prices economy-wide—potentially overwhelming the direct inflationary impact of higher import costs.

Economic uncertainty and declining stock prices, both of which historically coincide with major tariff shocks, appear to be key transmission mechanisms for this deflationary effect, the researchers found.

What This Means for Fed Policy

The implications for monetary policy are significant. If tariffs are indeed deflationary rather than inflationary, the appropriate Federal Reserve response would be to cut interest rates—not to hold them steady or raise them to combat expected price increases.

This insight arrives at a particularly sensitive moment for the Fed. With Chair Jerome Powell's term expiring in May and President Trump expected to name a successor in the coming weeks, questions about how the central bank should respond to trade policy are front and center.

Currently, traders are pricing in two rate cuts for 2026, compared with the Fed's own projection of just one. If the San Francisco Fed's research gains traction among policymakers, it could provide intellectual cover for a more aggressive easing path.

Important Caveats

The researchers themselves urge caution in applying historical findings to today's economy. Modern supply chains are far more globally integrated than they were a century ago, with U.S. manufacturing relying heavily on imported components and materials.

"The historical findings may not apply perfectly to today's economy," the researchers wrote, noting that current tariffs are "unprecedented in magnitude" compared to the past four decades of trade data.

Still, the research provides a valuable counterweight to the reflexive assumption that tariffs must equal inflation. As with so much in economics, the real-world effects of policy are often more complex—and sometimes counterintuitive—than simple models suggest.

Key Takeaways for Investors

  • Bond markets: If tariffs prove deflationary, longer-duration bonds could outperform as the Fed cuts rates more aggressively than expected
  • Equities: The demand-destruction effects highlighted in the research suggest investors should monitor consumer spending and business investment closely
  • Dollar: A more dovish Fed response to tariffs could put additional pressure on the U.S. dollar
  • Commodities: Reduced demand could weigh on industrial commodities, even as tariffs raise input costs

The San Francisco Fed's research won't be the final word on tariffs and inflation. But it serves as a powerful reminder that in economics, conventional wisdom isn't always wise—and that investors who question consensus assumptions often find themselves ahead of the curve.