Tariffs – The Next Challenge

Normally, the Federal Reserve reacts to inflation and unemployment. The President and the Treasury Department should react to the same issues in the long run, but the short run can be influenced by politics.

Right now inflation has been slowly moving down, helped by oil but certainly about to increase as tariff increases are attempted to be passed to consumers. The Fed's 2% inflation target is very unrealistic in a growing economy. The rate of inflation change is considered a leading economic indicator, for example rising inflation normally leads to higher interest rates.

Unemployment remains quite low, as Federal employee layoffs are staggered.  Corporations generally will not accelerate their layoffs until the economy slows further and profits decline.  Thus, unemployment is considered a lagging indicator.

It certainly appears that President Trump wants the tariffs to help our deficits and lead to further declines in tax rates - for everyone, whereas Powell continues to work from often lagging data. To be fair to Powell, no one knows the impact of tariffs as yet while negotiations are 'continuing', including trading partners' retaliatory moves. And he has often mentioned that a first surge of inflation such as during the Pandemic is frequently followed by a second more painful one.

We are about to hear more about ‘Unintended Consequences’ from the attempted reversal of the rise of globalism through world trade since World War II. The reversal of globalism reflects the attempt to bring jobs and manufacturing back to the U.S., which is a difficult and lengthy process with no assurance of success.  It is extremely difficult to reverse 80 years of global just-in-time trade patterns and ignores the prosperity it has brought to the world.

Perhaps some compromises can be reached at much lower tariff rates? Stay tuned.