Business Leaders’ Guide To Fed Policy

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Analyzing tariff effects on inflation. getty Inflation may be down to the Federal Reserve’s target, if we subtract the effect of tariffs. Perhaps, then, the Fed can bring down interest rates more. That’s an implication of research at Harvard Business School’s Pricing Lab. Their “data contain daily prices scraped from the online stores of large multichannel U.S. retailers.” They calculate duties on the products and find that so far, pass-through to consumers averages 20% of the tariff. (That will likely rise to 100% within a few years, in my judgment.) Inflation Statistics They compare the tariff-induced inflation to the overall Consumer Price Index: “This implies that the annual inflation rate in the CPI, which in August 2025 (latest available) stood at 2.9 percent (NSA, CPI-U), would have been instead about 2.2 percent without the tariffs.” Since that research, another month of CPI data showed about the same inflation rate. The Federal Reserve targets the Personal Consumption Expenditures Price Index, which uses the same underlying raw data as the CPI but weights it differently to account for changes in consumer spending by category. That index averages about 0.4 percentage points lower than the CPI. So the Fed’s target translates to about 2.4% CPI inflation, and we would be at roughly 2.3% if not for tariffs. I am doubtful that underlying inflation has truly dropped that low, though I have not performed the detailed analysis that the Pricing Lab did. The study contains assumptions and estimates that may turn out to be inaccurate. Disinflationary pressure has not seemed strong enough for that result, at least not in the first three quarters of 2025. But let’s assume the analysis is accurate, and let’s further assume that Federal Reserve staff come to the same conclusion. What can we expect for interest rates going forward?…