President-elect Donald Trump's proposed tariffs on America's major trading partners are expected to lead to higher prices, potentially prompting the Federal Reserve to halt interest rate cuts and consider increases. The Fed Chair, Jerome Powell, mentioned in a recent speech that it is premature to assess the impact of these tariffs on the US economy, emphasizing the distinction between campaign promises and actual policy implementation.
Trump's tariff threats, including imposing 25% tariffs on Mexico and Canada and an additional 10% duty on Chinese goods, could significantly affect the flow of approximately $1.5 trillion worth of goods across North America, as estimated by the International Monetary Fund.
Concerns have arisen on Wall Street regarding potential inflation resurgence under a second Trump term, with bond yields rising in anticipation. However, higher inflation resulting from tariffs could deter the Fed from lowering borrowing costs, maintaining the attractiveness of cash-like and bond investments.
Fed officials are expected to develop economic models to analyze various tariff scenarios, considering factors such as retaliatory tariffs and public perceptions of inflation. In a similar situation in 2018, the Fed contemplated raising rates in response to a trade war and consumer fears of increased inflation.
While Mexican President Claudia Sheinbaum has hinted at retaliatory tariffs, current consumer surveys indicate a decline in inflation expectations for the upcoming year. Despite this positive trend, consumers remain concerned about rising prices, reflecting a preference for lower prices in the new year.
Although the Fed has initiated rate cuts, mortgage rates have risen post the first cut in September, tracking the yield on the 10-year US Treasury note. Fed officials acknowledge the need for further rate cuts to support the economy, particularly to alleviate financial burdens on lower-wage earners.
With a stable labor market and robust consumer spending, the Fed aims to balance economic growth while addressing concerns about interest rates. The evolving economic landscape suggests a cautious approach to rate adjustments to sustain economic stability.
