A new National Bureau of Economic Research (NBER) paper studies tariffs and monetary policy:

We study the optimal monetary policy response to the imposition of tariffs in a model with imported intermediate inputs. In a simple open-economy framework, we show that a tariff maps exactly into a cost-push shock in the standard closed-economy New Keynesian model, shifting the Phillips curve upward. We then characterize optimal monetary policy, showing that it partially accommodates the shock to smooth the transition to a more distorted long-run equilibrium—at the cost of higher short-run inflation.

Werning et al. show that “optimal” monetary policy calls for partial accommodation of tariff shocks—essentially allowing some inflation to persist to smooth the transition to what they euphemistically call “a more distorted long-run equilibrium.” With core PCE still running above the Fed’s 2% target and renewed tariff threats on the horizon, this research suggests Powell may need to abandon his recent dovish pivot and prepare for rate hikes that prioritize price stability over employment concerns. The dual mandate was never meant to be dual when the two mandates point in opposite directions.