The federal reserve can find itself in Catch-22 policy if the definitions raise inflation

The sophisticated scenario surrounding the customs tariffs that can put the federal reserve in an uncomfortable hunting 22, is not sure whether its policy cranes will be used to tame inflation or increased growth.

With many bridges so far in the president Donald TrumpIts efforts to use the fees as a tool for foreign and economic policy, the central bank will have an accurate hit.

Many economists expect the customs tariff to raise prices and fly the GDP, with the main question being a degree of any need for federal reserve policy modifications.

Cathy Jones, a strategic fixed income head in Charles Schwab, said. “I put this mixture together and put the federal reserve in a real link.”

There are a lot of moving parts that occur in Trump's dispute with China, Canada and MexicoThree commercial partners of the United States. As matters are now approaching, threatened duties against Canada and Mexico have been postponed, where the president negotiates with the leaders of those governments. But the situation with China quickly escalated to the struggle of his dream against markets on the brink of the abyss.

Different history

The definitions that cause higher prices in practice are an article Iman for economists, although the historical record provides lower certainty. For example, the SMOOOT-HWLEY tariff in 1930 demonstrated that it was disguised because it helped exacerbate the great depression.

When Trump launched the definitions in his first term, the inflation was low and the Federal Reserve was raising rates because it sought a “neutral” level. A The manufacturing stagnation followed that In 2019, although it did not spread to the wider economy.

This time, the targeted tariffs previously used by Trump have been replaced by Threat the duties of the blanket It can change the calculus calculation of monetary policy. Schwab is exposed to the fact that the full tariffs can reduce 1.2 % of GDP growth with the addition of 0.7 % to the basic inflation, pushing the last scale above 3 % in the coming months.

Jones said the broader definitions “have a greater prices and the impact of more growth on the road.” Therefore, I can see (Federal Reserve) to stay for a longer period, with the threat of definitions suspended on the market and perhaps seeing these price increases and then having to threaten later in the year, or next year, or (whenever) that shows the effect of growth. .

“But they are definitely in a difficult place at the present time, because it is a currency.”

actually, The markets are largely expected that the Federal Reserve will keep tightly During the next few months, at least the policy makers against the discourse notes the definitions, as well as searching for the impact of the full interest rates in the last four months of 2024.

If any of the parties flashed on the definitions, or if it is less enlarged than thought, the Federal Reserve can return to focusing on the employment side in its double mandate and mutation away from inflation concerns.

“They are very comfortable suspended now, and the back will not affect customs duties on this, especially since we do not even know how it will look,” said Eric Winozrad, advanced market manager. Search in allioncebernstein. “You are talking several months ago that this will be useful to affect their thinking.”

“A lot of uncertainty”

Winogra is among those who believe that although customs tariffs can lead to one -time reinforcement for some prices, it will not generate the type of basic inflation that officials in the federal reserve when politics are set.

This matches some recent data from federal reserve officials, who say the definitions are likely to affect decisions if they generate a complete trade war or contribute in one way or another to drivers or basic demand.

“There is a lot of uncertainty about how policies are evolved, and without knowing the actual policy, it cannot really be very accurate about possible effects,” said Boston Susan Collins' President Susan Collins at CNBC. Monday interview. From the political perspective, Collins said her current position is “be patient and cautious, and there is no urgency to make additional adjustments.”

Market pricing It still indicates a reduction in the potential federal reserve price at the June meeting, then perhaps a reduction in another percentage in December. Federal Reserve last week He chose to keep the federal funds fixed In the range between 4.25 % -4.5 %.

Winograd said he sees a scenario as it can cut the federal reserve two or three times this year, although not starting later with the operation of the customs tariff.

“Given the extent to which the American economy is generally isolated from commercial frictions, I do not think it moves the federal needle a lot,” said Winozard. “The market assumes a very mechanical for the function of the reaction from the Federal Reserve where inflation rises, they must respond to it, which is not simply true.”