# Dual Mandate Tensions

**Author:** Philipp D. Dubach | **Published:** May 21, 2025 | **Updated:** February 23, 2026
**Categories:** Macro
**Keywords:** Fed dual mandate tariffs, tariff cost-push shock, optimal monetary policy, Phillips curve tariff inflation, Federal Reserve inflation employment

## Key Takeaways

- NBER research shows tariffs map directly into cost-push shocks, shifting the Phillips curve upward and forcing the Fed to choose between inflation and employment.
- Optimal monetary policy would partially accommodate tariff inflation, allowing prices to overshoot to smooth the transition rather than crushing output with rate hikes.
- The dual mandate was never designed for scenarios where price stability and maximum employment point in opposite directions simultaneously.

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Something interesting just happened at the National Bureau of Economic Research NBER
> 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.

Here's where it gets interesting for current policy: Werning et. al. 
show that "optimal" monetary policy would actually 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.



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## Frequently Asked Questions

### How do tariffs act as cost-push shocks for the Federal Reserve?

According to NBER research by Werning, Lorenzoni, and Guerrieri, tariffs map directly into cost-push shocks in the New Keynesian model by raising the cost of imported intermediate inputs. This shifts the Phillips curve upward, forcing the central bank to choose between tolerating higher inflation or accepting greater output losses.

### What does partial accommodation of tariff inflation mean for Fed policy?

Partial accommodation means the Fed would allow some tariff-driven inflation to persist rather than fighting it with aggressive rate hikes. The NBER paper argues this is optimal because it smooths the economic transition to a new equilibrium, avoiding a sharp contraction in output and employment, even though it means inflation stays above target in the short run.

### Why does the Fed's dual mandate become a problem during tariff shocks?

The dual mandate requires the Fed to pursue both price stability and maximum employment. Tariff shocks push inflation higher while simultaneously threatening job losses, forcing the Fed to choose which mandate to prioritize. Rate hikes to control inflation would worsen unemployment, while holding rates to protect jobs would allow inflation to persist.

### What does the Phillips curve shift caused by tariffs mean for interest rates?

When tariffs shift the Phillips curve upward, the trade-off between inflation and unemployment worsens. The Fed faces a higher inflation rate at every level of unemployment, meaning it cannot reduce inflation without accepting more job losses. This may force rate hikes even when the labor market is already weakening.


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*Philipp D. Dubach — [http://philippdubach.com/](http://philippdubach.com/) — 2025*