• Federal Reserve Governor Musalem indicates the economic impact of new tariffs will unfold over multiple quarters, not immediately.
  • Recent analysis projects tariffs will raise consumer prices by 1.8% in the short run and reduce real GDP growth by 0.5 percentage points in both 2025 and 2026.
  • The labor market is expected to weaken, with payrolls forecast to be lower by 505,000 jobs by the end of 2025 and the unemployment rate rising.

Federal Reserve Governor Alberto Musalem stated on Thursday that the economic effects of the new tariff regime are set to ripple through the U.S. economy over the next two to three quarters, a timeline that suggests the full adjustment will likely unfold into early or mid-2026. His comments come as recent data and internal Fed analysis show these measures are already beginning to drive up consumer prices and are projected to lower economic growth.

The implementation of tariffs set in 2025 is projected to raise consumer prices by 1.8% in the short run, which analysts estimate translates to an additional cost of about $2,400 per household. The long-run price impact is only slightly lower at 1.5%, or roughly $2,100 per household. This immediate pass-through to inflation is occurring more rapidly than any potential offsetting adjustments in nominal wages, effectively reducing real household income.

On the macroeconomic front, the drag is significant. Real GDP growth is expected to decline by 0.5 percentage points in both 2025 and 2026 due to the combined effect of the tariffs and anticipated foreign retaliation. The labor market, which has shown resilience, is projected to soften considerably. Current models forecast the unemployment rate to be 0.3 percentage points higher by the end of 2025 and 0.7 points higher in 2026, with payroll employment lower by 505,000 jobs by year-end 2025.

The near-term data has been somewhat distorted by frontloading behavior, according to people familiar with the matter. In anticipation of the tariff hikes, several foreign economies aggressively boosted their exports to the U.S. in early 2025, which temporarily inflated import figures and growth statistics. This dynamic is expected to reverse sharply later in the year as those pent-up shipments wane, exacerbating the projected economic slowdown.

Efforts to reach a spokesperson for the Federal Reserve for additional comment on the timing of these effects were unsuccessful. The central bank's staff has previously estimated that a broad-based tariff scenario could lead to a decline in global GDP of 0.8%, with some models showing U.S. GDP falling by more than 2%. While tariff revenues provide a modest fiscal offset for the government, they are diminished if imports fall sharply, revealing a difficult trade-off between revenue gains and a broader economic contraction.

Sector-specific disruptions are already becoming apparent. Employment is expected to fall most sharply within manufacturing and sectors reliant on imported inputs. However, some domestic producers are seeing short-term gains as their goods become more competitive against now-costlier imports. The long-term outlook suggests a persistent negative effect, with the level of real GDP remaining around 0.4% smaller annually and a permanent export decline of 16.1%, even after the initial adjustment phase concludes.