The Fed’s Flawed Math on Trump’s Tariffs
A new study from New York Fed claims tariffs imposed during Trump’s first term inflicted trillions of dollars in economic harm and a serious “welfare loss” on Americans, yet the Trump years saw unprecedented gains in household income, a booming stock market, and historic lows in unemployment.
Something doesn’t add up.
Like so much economic analysis from the establishment, the Fed study arrives with breathless findings of calamity. According to the Fed, tariff announcements wiped out $4.1 trillion in U.S. stock market value, inflicted a three percent “welfare loss,” and sowed uncertainty across the economy. The verdict: tariffs are to blame for grievous harm to the American economy.
This fails even the simplest test of economic plausibility because the Trump years—at least prior to the pandemic—were a time of widespread economic prosperity, rising stocks, and stable prices. Any finding that the tariffs imposed significant harm has to overcome the unavoidable fact that the U.S. economy thrived during Trump’s presidency.
Americans know this, even if Mary Amiti, Matthieu Gomez, Sang Hoon Kong, and David E. Weinstein—the authors of the Fed study—do not. Every survey of public opinion shows that Americans understand they were better off economically when Trump was president. And over the past month, Trump’s election has spurred a surge in economic optimism.
A deeper examination reveals that this study is less a verdict on tariffs than a cautionary tale about the dangers of narrow framing. Its conclusions rest on a selective and myopic methodology that overstates short-term volatility while ignoring the economy’s remarkable adaptability. They are an artifact of the study’s method rather than a description of the economic reality.
Looking Beyond the Fed’s 10-Day Window
At the heart of the Fed’s study is an event-study approach that measures stock market reactions immediately following a tariff announcement and then looking at them only within a narrow 10-day window following the announcements. The idea is simple: tariffs roiled markets, causing immediate declines in stock valuations, which the study equates with economic damage.
The study found that, within the 10-day window following tariff announcements during the 2018–2019 U.S.-China trade war, the cumulative effect on U.S. stock market valuations was a decline of 11.5 percent, equating to a $4.1 trillion loss in firm equity value
But why stop at 10 days? Why not examine 15, 30, or 60 days? When we expand the lens, the story changes dramatically:
- At 15 days, the S&P 500 shows a 6.23 percent gain.
- At 20 days, stocks rise 6.0 percent.
- At 30 days, the gain rises to 7.24 percent.
- At 60 days, the market is still up 3.24 percent.
If we just add two more trading days to the Fed’s study—so that we’re looking at 12 days instead of 10—we get a gain of 4.7 percent.
These longer windows reveal a pattern: the market’s initial fears gave way to recovery and growth. Far from signaling lasting harm, the medium-term rebound suggests that investors—and the economy—adapted quickly to the new trade landscape.
The study’s fixation on 10 days magnifies short-term noise and creates a distorted narrative. Markets react to uncertainty, and tariffs were certainly disruptive. But disruption is not destruction. The broader trajectory of the market tells a story of resilience, not fragility.
Stock Volatility ≠ Economic Harm
The study further errs in treating temporary stock market declines as a proxy for economic damage. Stocks move on sentiment as much as fundamentals, and tariff announcements created plenty of sentiment and negative headlines that may have spooked investors over fear of retaliation, uncertainty over supply chains, and speculation about global trade.
But let’s consider the actual economy. Over the two years of the trade war, the S&P 500 delivered a cumulative gain of 7.24 percent, including a stellar 31.49 percent rally in 2019. The economy expanded 2.9 percent in 2018 and then 2.3 percent in 2019, well above the Fed’s longterm growth estimate of 1.8 percent. Unemployment averaged 3.9 percent in 2018 and then fell further to 3.7 percent in 2019. Domestic manufacturing began to claw back market share. Consumer prices rose by a mere 1.9 percent in 2018 and 2.3 percent in 2019. Real median household income experienced a historic jump of 6.8 percent, reaching $68,703, in 2019. This was the largest annual increase on record. If tariffs inflicted lasting harm or “welfare loss,” where’s the evidence?
The truth is that tariffs forced the beginning of a recalibration of global trade. Supply chains shifted. Businesses adapted. Consumers adjusted. The short-term volatility captured by the Fed’s study is real, but it tells us little about the economy’s underlying strength.
A Convenient Omission: The Broader Context
The Fed claims to control for simultaneous events, such as employment or inflation data releases, but its analysis fails to account for the broader economic environment of 2018–2019:
- Federal Reserve Policy: In 2018, the Fed raised rates four times, tightening financial conditions and amplifying market jitters. In 2019, the Fed reversed course, cutting rates three times and helping to fuel the market’s rebound.
- Global Growth Fears: The trade war coincided with broader concerns about a slowing global economy, which weighed on export-heavy industries.
These factors undoubtedly influenced markets, yet the study treats tariffs as the sole villain. It’s a convenient narrative but a simplistic one.
The Case for Tariffs
Critics of tariffs love to invoke free trade orthodoxy, but they ignore the lopsided realities of U.S.-China trade. For decades, American workers bore the brunt of globalization, watching their factories shutter and their communities hollow out while China exploited its access to western markets.
The 2018–2019 tariffs were a necessary correction. They forced China to the negotiating table and signaled that the U.S. would no longer tolerate one-sided trade relationships. Yes, tariffs caused disruption, but disruption is often the price of progress. The long-term benefits of recalibrating our trade policy far outweigh the temporary volatility captured in the Fed’s study.
The real story of what Trump’s critics call a “trade war” isn’t one of economic harm—it’s one of resilience. Tariffs jolted markets, but the economy adjusted and thrived. The Fed’s 10-day window captures the panic but misses the recovery. Its findings, far from damning tariffs, highlight the adaptability of American businesses and investors.