Tariff Uncertainty Clouds Economic Outlook
President Trump's impending tariff deadlines have cast a shadow of uncertainty over markets. Despite the self-imposed deadline of Saturday for 25% tariffs on Canada and Mexico and 10% duties on China, ambiguity remains regarding the specifics, including the potential application to oil.
Mixed signals from Trump's inner circle have further exacerbated the volatility. Yale Budget Lab's Ernie Tedeschi emphasizes the "considerable uncertainty" surrounding the 2025 Trade agenda, with potential tariff increases ranging from 7% to 27%, potentially marking a historic shift in trade and tax policy.
Concerns center on the impact of tariffs on inflation and subsequent implications for the Fed's interest rate strategies. Deutsche Bank's Matthew Luzzetti suggests that without tariffs, core PCE inflation, the Fed's preferred gauge, would likely fall to 2.5% by year-end, aligning with the Fed's target. However, 25% tariffs on Mexico and Canada could elevate inflation to 3% or higher, leading to an acceleration rather than deceleration.
This uncertainty has prompted the Fed to adopt a wait-and-see approach, as emphasized by Chair Jerome Powell. Powell acknowledges the unprecedented economic volatility stemming from "significant policy shifts," including tariffs. However, he highlights the numerous unknowns, including the targeted goods, duration, magnitude, countries involved, potential retaliation, and transmission through the economy to consumers.
"We don't know what's going to be tariffed... We don't know for how long, or how much, what countries. We don't know about retaliation. We don't know how it's going to transmit through the economy to consumers," Powell states, emphasizing the need to monitor the situation closely.