Inflation Complicates Trump's Inflation-Curbing Promise
President Trump's efforts to curb inflation face a setback after January's Consumer Price Index (CPI) exceeded expectations. This development has rattled markets, prompting pressure on stocks and a surge in bond yields. Investors have scaled back expectations for interest rate cuts, while some contemplate the possibility of a hike.
Potential Collision with Federal Reserve
Economist Nouriel Roubini warns that a delayed rate cut alone could trigger a "collision course" between Trump and the Federal Reserve. Despite Trump's calls for rate reductions, Fed Chair Jerome Powell has indicated a slow pace for cuts. This stance has fueled tensions between the two sides.
Trump's Tariff Agenda
Trump's advocacy for lower rates conflicts with Powell's cautious approach. Amidst these tensions, Trump has advocated for tariffs, invoking their role in conjunction with his tariff agenda. However, Wall Street remains skeptical, citing the potential for these policies to exacerbate inflationary pressures.
Market Impact
Economists Mark Zandi and Nouriel Roubini warn that Trump's tariffs could backfire by elevating inflation and suppressing economic growth. Moody's Analytics predicts a 0.5% increase in consumer price inflation within a year if tariffs on Canada, Mexico, and China are fully implemented. Moreover, the threat of a trade war poses risks to equities.
Potential Market Correction
Roubini forecasts a modest single-digit return for the S&P 500 under "moderate" Trump policies. However, he cautions that "bad policies" could compel the Fed to maintain higher rates, increasing the risk of a market correction.
Constraints on Trump's Policies
Roubini identifies four "guardrails" that could curb the potential for harmful policy implementation:
* Market discipline
* Fed independence
* Strong economic advisors
* Bond vigilantes
Among these, bond vigilantes are seen as the most potent check on Trump's policies.