Inflation, Tariffs Complicate Trump's Promise of Rate Cuts
President Trump's pledge to curb inflation faces new hurdles following the release of a hotter-than-expected Consumer Price Index (CPI). The report jolted markets, pressuring stocks and sending bond yields soaring as investors scaled back expectations for interest rate cuts.
Economist Nouriel Roubini warns that even a delay in rate cuts could create a "collision course" between Trump and the Federal Reserve. Trump has repeatedly called for the Fed to lower rates, echoing his tariff policy.
Fed Chair Jerome Powell has resisted these calls, stating that the Fed will maintain a restrictive stance until inflation is under control. Meanwhile, Roubini and Mark Zandi of Moody's Analytics believe Trump's proposed tariffs, including those on China, Canada, and Mexico, will exacerbate inflationary pressures.
Zandi projects that if tariffs are fully implemented, consumer price inflation would rise 0.5% within a year, while GDP would decline by 0.6%. Goldman Sachs' David Kostin warns that tariffs pose a significant risk to corporate earnings.
Roubini predicts that the S&P 500 will perform in the single digits this year under "moderate" Trump policies. However, he warns that "bad policies" could force the Fed to hold rates, increasing the likelihood of a market correction.
Roubini identifies four "guardrails" that may prevent "bad policy from becoming really bad": market discipline, Fed independence, strong economic advisers, and bond vigilantes. He believes bond vigilantes will ultimately act as the primary check on Trump's policies.