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This edition was written by Alex Conner, Tristan Loa, Georgia Nabors, and Louise Sheiner.
Carola Binder of the University of Texas at Austin, Cody Couture of Hamilton College, and Abhiprerna Smit of William & Mary use Gallup, Michigan Survey of Consumers, and custom survey data from 2021 to 2025 to assess partisan trust in the Federal Reserve. They find that, for most of the sample period, respondents whose political views align with the then-current president report higher trust in the Fed. Independents are, in general, less trusting than Democratic or Republican partisans. Partisanship is a stronger predictor of trust than other characteristics, although being male, more educated, and having a higher income are significantly associated with higher trust in the Fed. These patterns changed in 2025: Republican distrust of the Fed rose quickly during the Biden administration and did not reverse after President Trump took office. The authors show that accounting for the partisan trust gap does not explain the large partisan gap in inflation expectations. Republicans, who reported low trust and expect low inflation, explained their expectations by referencing President Trump directly. Democrats, who reported higher trust and higher inflation expectations, mostly cited tariffs.
How will tariffs affect macroeconomic outcomes? Şebnem Kalemli-Özcan and Can Soylu of Brown and Muhammed Yildirim of Harvard model the net effect of tariffs on an economy through three channels: a reallocation in demand between foreign and domestic products, endogenous monetary policy responses across countries, and changes in exchange rates. They predict that the 2025 “Liberation Day” tariffs, without retaliation, would reduce U.S. GDP by 0.8%, increase inflation by 0.5 percentage point, and decrease real wages by 2.7%. Mexico and Canada would experience even larger GDP reductions, but China’s output would fall more modestly due to a large depreciation in the yuan against the dollar. In a full-scale trade war with retaliatory tariffs imposed by foreign countries, the decline in U.S. GDP would double to 1.6%, and inflation would rise by 0.8 percentage point. If tariffs are announced but later withdrawn, the model projects a 0.7% decline in U.S. GDP and a 0.6 percentage point decrease in inflation, the result of consumers reducing demand in anticipation of future distortions.
Analyzing Bureau of Economic Analysis data on U.S. foreign direct investment (FDI) and the activity of U.S. multinationals, Cody Kallen of the Federal Reserve Board finds evidence of economic fragmentation through friendshoring and nearshoring. In particular, U.S. FDI in 2022 and 2023 shifted away from Hong Kong and China towards Mexico and India, with advanced manufacturing investment favoring Mexico, large European countries, and the United Kingdom. This trend is also consistent with data on U.S. multinational enterprises—which track the ultimate destination of flows, unlike the FDI data—that show a redirection of capital expenditures and employment away from China towards Mexico and India. The author also observes tentative signs, based on 2022 data, of some reshoring of activity back to the U.S. in high-tech industries and advanced manufacturing, but not in other sectors.
"As we gain a better understanding of the policy changes, we will have a better sense of the implications for the economy, and hence for monetary policy. Tariffs are highly likely to generate at least a temporary rise in inflation. The inflationary effects could also be more persistent. Avoiding that outcome will depend on the size of the effects, on how long it takes for them to pass through fully to prices, and, ultimately, on keeping longer-term inflation expectations well anchored," says Jerome Powell, Chair of the Federal Reserve Board of Governors.
"Our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem. As we act to meet that obligation, we will balance our maximum-employment and price-stability mandates, keeping in mind that, without price stability, we cannot achieve the long periods of strong labor market conditions that benefit all Americans. We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension. If that were to occur, we would consider how far the economy is from each goal, and the potentially different time horizons over which those respective gaps would be anticipated to close."
