It is almost a universal belief that tariffs will increase prices. A major question at hand, after this initial spike, will inflation become persistent?
It is also a near universal belief that tariffs will produce a related supply-side “disturbance” that may suppress output and employment.
The Federal Reserve is in an incredibly difficult spot. Most know the Central Bank has a dual but conflicting mandate…price stability and maximum employment.
It may have to raise interest rates as employment starts to falter. Or it may have to lower interest rates as inflation is rising.
Wow! Either way the Fed [and the economy/market] is in tough spot.
And then there are the political overtones. Whatever the Fed does may become a fierce political controversy created by the Whitehouse.
Last week Secretary Bessent faced questions about the politicization of the Fed including potential allegations of “yield curve suppression.” It was widely reported that for “some time spanning both Administrations” the Treasury had been buying the long-term debt that the Federal Reserve was selling (or not rolling over) via QT in attempt to provide liquidity and keep long term yields from rising.
Most financial media organizations wrote about this stating that the Fed and the Treasury were working against each other, implying a political dimension catering to one’s readership base.
This week is the release of several inflation statistics. At the time of this writing “the market” is suggesting three interest rate reductions. Ten days ago, it was four. The Federal Reserve has not released a new “dot plot,” the last of which indicated the Central Bank may lower rates by 50 bps.
How will this data influence perceptions?
Commenting further about potential inflation, Richmond Fed Bank President Tom Barkin stated Friday that “it is not a given that companies raise their prices to offset the cost of tariffs,” warning that consumers’ tolerance after years of inflation is only so high.
Barkin stated “it may not be that easy to pass it on as one might think.” Writing the obvious this would crush companies’ margins and may be a catalyst for increased layoffs, lower profits and equity prices.
Barkin further said “declaring that one risk [inflation or unemployment] is more significant than the other right feels almost like guessing. This is not a kind of policy change that has a one-month impact on prices, and this is not a situation we have in a lot of times.”
Commenting on Friday’s market activity, most markets were relatively quiet ahead of weekend meetings with China and this week’s economic data.
As noted, the economic calendar is comprised of several inflation indices including the PPI, the CPI and import/export prices, retail sales, a small business and consumer sentiment survey, and some housing statistics. How will the data—specifically the inflationary data—influence outlooks.
Last night the foreign markets were up. London was up 0.50%, Paris up 1.35% and Frankfurt up 0.54%.. China was up 0.82%, Japan up 0.38% and Hang Seng up 2.98%.
Dow and NASDAQ futures are up 2.5% and 3.5%, respectively after a potential trade agreement with China. The 10-year is off 25/32 to yield 4.45%.
