There’s also, of course, the 145 per cent tariff on imports from China. Even if the US and China do talk and agree a deal, the levies on China are likely to be multiples of what they were before “Liberation Day.”
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Those “other” tariffs will, even without the reciprocals, feed into higher US prices and inflation and cause severe disruption to US supply chains, leading to shortages of stock and further shocks for businesses and consumers.
The US economy contracted in the March quarter, although that was largely the result of consumers and companies rushing to make purchases before the tariffs hit. The likelihood, with corporate and consumer confidence battered by the tariffs, is that it will remain weak through the rest of the year, with a Trump-induced recession a definite possibility.
That would normally cause the Fed to act by cutting rates decisively.
The tariffs (once the Trump administration decides their final form) ought to produce a one-time inflationary shock that the Fed could look through if the underlying economy were slowing significantly.
However, having been bitten once, badly, by the massive and enduring spike in inflation that was caused by the supply chain disruptions during the pandemic, the Fed won’t be quick to dismiss this new disruption to supply chains as “transitory.” Instead, it will be patient and wait for the actual effects of the tariffs on the inflation rate to show up before it moves.
[Fed chair Jerome Powell doesn’t want to cut rates] ‘because he’s not a fan of mine. You know he just doesn’t like me because I think he’s a total stiff.’Donald Trump
Powell has hinted that, if the central bank has to choose between containing inflation or protecting employment, the Fed will prioritise the inflation rate. The tariffs have created the prospect of stagflation, or an outcome where US inflation remains high even as the economic growth rate falls.
While Trump will, as he did again last week and at the weekend, call for immediate rate cuts and lambast Powell for not delivering them, he’s backed away from the threat he made last month to “terminate” Powell after a massive backlash in US markets.
“Why would I do that? I get to replace the person (Powell) in another short period of time,” he said in a television interview that aired on Sunday. Powell’s term as chairman, but not as a Fed governor, ends in May next year.
He said Powell doesn’t want to cut rates “because he’s not a fan of mine. You know he just doesn’t like me because I think he’s a total stiff.”
Whether or not Powell dislikes Trump (he’s got reason to, given the continual threats and abuse he’s been subjected to), has no influence over the Fed’s decision-making.
With the US inflation rate still above the Fed’s target and the jobs market still quite strong, there’s no credible argument for cutting rates at this moment, and there’s plenty of arguments for the Fed to be patient and wait for the tariff and budget-related events to unfold.
It’s not just the Fed that’s uncertain about what the outlook for the economy might be. US companies are just as uncertain, with many suspending their profit forecasts, or offering materially different earnings scenarios that are dependent on the severity of the tariffs’ impact on their businesses.
Those effects will be largely negative, potentially materially so. Car giant Ford said on Monday that, even with some exemptions for vehicle companies, the tariffs would cost it $US1.5 billion this year. GM said last week they could carve up to $US5 billion from its earnings.
The uncertainty is unlikely to be lifted soon, even if – as Trump and his Treasury Secretary Scott Bessent have indicated – the administration announces the first of its trade deals this week. India, Japan and South Korea are reportedly the first cabs off the rank in agreeing to deals rather than face the punitive reciprocal tariffs.
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Trade deals are complex, with the detail usually painstakingly negotiated over years, not weeks, so it is likely that, if deals are announced, they will be more headlines than fully-fledged agreements.
Still, they would enable Trump to declare some victories, even if it takes years for the actual impact of the deals and the compliance of those signing them to become apparent. (China signed a deal in 2020, during Trump’s first trade war, promising to massively boost purchases of US products but, with the pandemic intervening, bought less from America than it had before the deal).
While the US sharemarket responded positively to the pause in the reciprocals and indications from China that it is willing to discuss a deal with the US (although that’s been China’s stance ever since Trump slapped his latest tariff on China’s exports), the bottom line is that trade between the US and the rest of the world may never again be what it was.
The universal tariffs and others remain in place, and the “deals” Trump’s team are negotiating will alter trade flows between the US and its trade partners.
There might be some re-shoring of activity to America, although Trump seems overly optimistic on that front, but costs of living in the US will rise and corporate profits will fall because of the trade war.
For the Fed, trying to weigh up the net outcomes on inflation, growth and employment at this point would be impossible, even if Trump weren’t constantly changing, and complicating further, the dense web of tariffs he’s created.
From its perspective, the safest course is to do nothing while waiting for the fog of war to lift.
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