Fed Rate Hike Risk Looms Amidst Trump Tariffs and Strong Economy
As the US economy thrives at a 3% GDP growth rate, concerns arise over the potential impact of Trump's tariffs and the Federal Reserve's response. According to Torsten Slok, chief economist at Apollo Global Management, the robust economy and potential inflation fueled by tariffs could prompt the Fed to raise interest rates.
Slok suggests that the first rate hike could occur during the mid-June Fed meeting, followed by additional increases if inflation accelerates. The market, which currently expects the Fed to hold rates steady or lower them, may be surprised by this shift.
Estimates on the inflationary impact of tariffs vary. Deutsche Bank predicts the steel and aluminum tariffs alone could boost the core PCE inflation index by 0.4%, while tariffs on Mexico and Canada could raise inflation above 3.5%. Goldman Sachs estimates that sustained 25% tariffs on Canadian and Mexican imports could lift the PCE by 0.7% and reduce GDP by 0.4%.
Slok emphasizes that the market has not yet factored in the potential for rate hikes. Goldman Sachs strategist David Kostin warns that firms may absorb higher costs, squeezing profit margins, or pass them on to consumers, reducing sales volumes. Kostin projects a 2-3% decrease in S&P 500 earnings per share if tariffs persist.
With the US economy running at a healthy pace and tariffs potentially igniting inflation, the Fed's likelihood of raising rates is increasing. The market should prepare for adjustments in profit estimates and potential shocks as the central bank takes action to control inflation.