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US President Donald Trump announced reciprocal tariffs on April 2, as he had vowed. The tariffs have led to a crash in US stocks, and the S&P 500 Index fell 10% in just two days. The Dow Jones fell 2,200 points on Friday, which was the worst single-day fall in almost five years.
The tech-heavy Nasdaq Composite Index is now in a bear market territory having fallen over 20% from its all-time highs. The S&P 500 is also on the verge of a bear market and is down 17% from all-time highs.
Meanwhile, Fed chair Jerome Powell has said that the tariffs could push up inflation and hit US economic growth.
Powell Says Tariffs Could Fuel Inflation
Speaking at a business journalism conference in Arlington, Va. Powell said, “Higher tariffs will be working their way through our economy and are likely to raise inflation in coming quarters.”
He added, “While uncertainty remains elevated, it is now becoming clear that tariff increases will be significantly larger than expected, and the same is likely to be true of economic effects, which will include higher inflation and slower growth.”
Sounding an alarm over the long-term impact of Trump’s tariffs, Powell stressed, “The size and duration of these effects remain uncertain. While tariffs are highly likely to generate at least a temporary rise in inflation, it is also possible that the effects could be more persistent.”
Fed Has Been Watching Trump Administration’s Policies
Notably, this is not the first time that Powell has cautioned against the tariffs. In his speech for the US Monetary Policy Forum last month, Powell said, “the new Administration is in the process of implementing significant policy changes in four distinct areas: trade, immigration, fiscal policy, and regulation.”
He added, “It is the net effect of these policy changes that will matter for the economy and for the path of monetary policy. While there have been recent developments in some of these areas, especially trade policy, uncertainty around the changes and their likely effects remains high. As we parse the incoming information, we are focused on separating the signal from the noise as the outlook evolves. We do not need to be in a hurry, and are well positioned to wait for greater clarity.”
Powell Signals a Wait-and-Watch Approach Amid Tariffs
Meanwhile, Powell has yet again signaled a wait-and-watch approach to future rate cuts and said, “It feels like we don’t need to be in a hurry. It feels like we have time. He added, “Inflation is going to be moving up, and growth is going to be slowing, but to me it’s not clear at this time what the appropriate path for monetary policy is going to be. We’re going to need to wait and see how this plays out before we make those adjustments.”
The current Fed fund rates are 4.25%-4.5 %, the same as in December 2022. The US central bank cut rates by 100 basis points last year after increasing them gradually in the previous two years.
While it began with a 50-basis point rate cut in September, it followed up with 2 cuts of 25 basis points at subsequent meetings.
Trump Calls Upon Fed to Cut Rates
Notably, while Trump appointed Powell as the Fed chair, the relations between the two were quite fraught as Powell raised rates during Trump’s presidency, much to his displeasure. In 2022, Biden re-appointed Powell as the Fed chair for four years, and Trump said that he wouldn’t try to remove him from the position. Trump has meanwhile called upon the Fed to cut rates and said on his Truth Social, “This would be a PERFECT time for Fed Chairman Jerome Powell to cut interest Rates. He is always ‘late,’ but now he could change his image, and quickly.”
Trump added, “Energy prices are down, Interest rates are down, Inflation is down, even Eggs are down 69%, and Jobs are UP, all within two months – A BIG WIN for America. CUT INTEREST RATES, JEROME, AND STOP PLAYING POLITICS!”
Meanwhile, during his speech on Friday, Powell emphasized that the Fed’s actions are not driven by politics but by its goal of “maximum employment and price stability.”
“We’re driven by analysis and careful thought, and discussion, and debate and the merits of things,” said Powell. The Fed chair emphasized, “We try to stay as far as we can from the political process,”
Economists Warn of Recession Amid Escalating Trade War
Several economists have warned of a recession amid the escalating global trade war. JPMorgan for instance has raised the odds of a US recession this year to 60% as compared to 40% before the tariff announcement. In his note, Bruce Kasman, head of global economic research said, “These policies, if sustained, would likely push the US and possibly global economy into recession this year.”
Allianz’s Chief Economic Advisor Mohamed El-Erian has also warned about the growing risk of a recession. “You’ve had a major repricing of growth prospects, with a recession in the U.S. going up to 50% probability, you’ve seen an increase in inflation expectations, up to 3.5%,” said Erian speaking with CNBC on the sidelines of the Ambrosetti Forum in Cernobbio, Italy.
Separately a Deutsche Bank survey shows a nearly 50-50 chance of a recession. UCLA Anderson Forecast has also recently issued its first-ever recession watch amid concerns over Trump’s policies.
Are Trump’s Tariffs a Mistake?
While Trump sees tariffs as a tool to address the country’s burgeoning trade and budget deficit, many economists believe that they would only end up raising costs for Americans. Jeremy Siegel, professor at the University of Pennsylvania’s Wharton School said “I think this is the biggest policy mistake in 95 years.”
He added, “I don’t know why Trump didn’t learn the lesson of the Smoot–Hawley Tariff [Act], because I know the [Federal Reserve] learned the lesson of its mistakes in 1930, ’31 and ’32. That’s one reason why the great financial crisis did not turn into a Great Depression. We flooded the banks with liquidity, which we did not do 95 years ago.”
Siegel said that recession odds will rise above 50% if these tariffs stay. He however added, “If he removes it, we won’t have a recession. We’ll have a slowdown.”
Siegel noted that tariffs would not serve the desired purpose and said, “If we did eliminate all tariffs … we would still have the U.S. [with] a trade deficit with the rest of the world, and so this idea that … is stuck in Trump’s head that a trade deficit is inherently bad is just absolutely wrong on every single measure.”
