Summary of Economic Implications of Possible Tariff Scenarios Industry Overview - The analysis focuses on the implications of proposed tariff increases in the United States, particularly under the Trump administration's trade policies, which have raised the effective tariff rate (ETR) significantly. Key Points and Arguments Tariff Increases and Proposals - The US's effective tariff rate has increased by approximately 9 percentage points (pp) so far, with proposals for higher "reciprocal" tariffs on several countries, including a 50% sectoral tariff on copper and a potential rise in baseline tariff rates to 15-20% [2][5][6]. - The expectation is for the ETR to rise by around 14pp by the end of the current year, with further increases anticipated in 2026 and 2027, leading to a total increase of 17pp by 2027 [2][6]. Inflation and Consumer Prices - The proposed tariffs are estimated to boost core Personal Consumption Expenditures (PCE) prices by about 1.7% cumulatively over the next 2-3 years, with revised expectations for year-over-year core PCE inflation of 3.3% in December 2025, 2.7% in 2026, and 2.4% in 2027 [2][21]. - The passthrough rate of higher costs into consumer prices is now expected to be around 65%, down from 70% previously, indicating a slower adjustment to increased import costs [10][11]. Economic Growth Impact - The tariffs are projected to lower year-over-year GDP growth by approximately 1pp in 2025, 0.4pp in 2026, and 0.3pp in 2027, reflecting a tax-like effect on real spending across the economy [2][36]. - A cumulative GDP hit from the tariff scenarios is estimated at around 2%, with the most extreme scenario suggesting a 3.3% cumulative GDP hit, translating to a 1.7pp increase in the unemployment rate by 2027 [3][52]. Alternative Scenarios - Four alternative tariff scenarios were explored, ranging from a downside scenario with lower tariffs to an upside scenario with significantly higher tariffs, indicating a weighted-average ETR increase of 16pp in 2025 [39][41]. - The downside scenario could result in a 1.4% boost to core PCE, while the upside scenario could lead to a nearly 3% increase by the end of 2027 [44]. Uncertainty and Business Investment - Heightened uncertainty from tariff changes is expected to dampen business investment, although recent measures of policy uncertainty have decreased, suggesting a smaller drag on growth than previously anticipated [27][36]. - The analysis indicates that financial conditions have loosened despite tariff increases, which may mitigate some negative impacts on capital expenditures [32][36]. Conclusion - The overall outlook suggests lower growth and higher inflation in 2026 and 2027 compared to previous forecasts, with risks tilted towards higher tariffs and inflation, and downside risks to growth through 2027 [57]. - The Federal Open Market Committee (FOMC) may adopt a wait-and-see approach to policy in light of potential tariff increases, with aggressive rate cuts becoming necessary if extreme tariff scenarios materialize [57].