While the Fed is in no rush to cut interest rates further in the near term, CIO believes the central bank will find itself in a place to do so later in the year as inflation moderates despite selective tariffs. (UBS)
Trump has in recent days reiterated plans to levy tariffs on a range of products including cars, semiconductors, pharmaceuticals, and lumber “over the next month or sooner,” with 2 April a key date to watch after his cabinet is due to devise specific import taxes. This followed his order to impose 25% tariffs on steel, aluminum, and a number of downstream metal products, as well as the temporarily delayed tariffs on Canadian and Mexican goods.
However, we continue to believe that eventual US tariffs are likely targeted measures rather than blanket levies, and the broad disinflation trend in the US should continue to advance, allowing the Fed to resume cutting interest rates.
Maintaining healthy growth and bringing down inflation are high on Trump’s agenda. Given the high political costs of elevated inflation, we continue to believe that the Trump administration will not want to jeopardize US economic growth or risk higher inflation through broad and sustained tariffs. A highly aggressive trade policy could lead markets to sell off amid lower growth forecasts and higher inflation expectations. With the President often looking to financial markets as an indication of his performance, we think certain tariff threats are utilized as a negotiation approach to get the US’s trading partners to lower import taxes on American goods or reach other agreements.
Broad-based reciprocal tariffs can be procedurally challenging. It’s important to note that members of Trump’s cabinet are not fully in place yet. Howard Lutnick was only confirmed as Commerce secretary by the Senate earlier this week, while the vote for Trump’s trade representative pick Jamieson Greer has yet to be held. We think the White House is likely to come out with a set of tariffs that are more carefully deliberated once Trump’s economic team is in full force. In addition, some proposed tariffs would be procedurally complicated to implement, with additional administrative steps that may require extra workforce at the US Customs and Border Protection agency.
Inflation should ease further over the course of the year. January’s consumer inflation rose more than expected, but shelter inflation has continued to moderate. With rising housing supply and slower rent growth in real-time data, we expect overall inflation to trend lower in the months ahead. Additionally, Fed officials noted the difficulty in fully removing seasonal distortions from inflation data at the start of the year, according to the minutes, and that the current monetary policy stance remains restrictive.
So, while the Fed is in no rush to cut interest rates further in the near term, we think the central bank will find itself in a place to do so later in the year as inflation moderates over time despite selective tariffs. We favor US equities and high-quality fixed income against such a backdrop, including five-year Treasuries and investment grade corporate bonds.
Original report: Fed easing still in store despite inflation concerns, 20 February 2025.
