They’re not a reason in themselves to tighten or loosen monetary policy. But the Fed should keep an eye on inflation expectations.

A lot of critics of Trump’s various proposals for higher tariffs have suggested that they will raise inflation and force the Fed to tighten money (either by delaying reductions in interest rates or by raising interest rates). Trump says, on the other hand, that a reduction in interest rates “would go hand in hand with upcoming Tariffs.” Who’s right?

I’m going to try to think it through as I write.

First: Obviously tariffs raise the price of some goods, although their supporters sometimes obfuscate the point. The price of imported goods subject to the tariffs will increase relative to everything else: that’s pretty much the purpose of protective tariffs. The price of domestic goods that compete with those imports will increase too, as domestic producers are the ones being protected, after all. (The idea that you can avoid paying more because of tariffs if you buy domestically produced goods, which tariff supporters sometimes state, is false. The domestic producers will respond to their competitors’ price hikes in part by raising their own prices.) The price of goods that use imported components will also tend to increase.

But second: We know that any effect of tariffs in pushing up the overall price level cannot be so large as to overcome disinflationary forces. No inflation surge accompanied Trump’s first-term increase in tariffs. The infamous Smoot-Hawley tariffs of 1930 coincided with deflation.

Third: If you hold the total amount of spending throughout the economy (or, better, the growth rate of that amount) constant, higher prices for the affected goods have to lead to some combination of lower prices for other goods and services and lower quantities of all goods and services. The net effect on overall prices is upward only to the extent that the tariffs lower the economy’s total output. (Because you’d have the same amount of spending chasing fewer goods and services.) So, if the tariffs make the economy half a percent less productive, they make prices half a percent higher.

Fourth: The Fed should probably just allow that kind of supply-driven increase in the price level rather than jacking up interest rates (or lowering them more slowly) to arrest it. That’s not because higher interest rates in response to tariffs would make Trump mad, although they would. It’s because tightening money would (a) inflict unnecessary damage on an economy already hit by the tariff to counter what would be (b) a temporary spike in inflation.

Fifth: The assumption in point three, that total spending would be unaffected, might not hold. Total spending might increase if the tariffs cause the money supply to rise or if they cause the velocity of money — that is, the speed with which money changes hands — to rise. I can’t see any reason the first effect would happen. The second might happen if, say, the tariffs lead to widespread, self-fulfilling expectations of price increases — if, for example, markets expect the Fed to react to the negative effect of the tariffs on output by letting the price level rise. But expectations could rise for any number of reasons, the Fed has some tools for gauging whether they are rising, and the Fed can counteract their increase regardless of the reason for their rise.

My tentative conclusion: The Fed shouldn’t do anything in direct response to increased tariffs. They’re not a reason in themselves to tighten or loosen monetary policy. But it should keep an eye on inflation expectations — which may already give it sufficient reason to tighten. And as I wrote last week, tightening, if needed, might be in Trump’s best long-term interest.