Tariffs Spook Central Bankers

One thing that I thought was particularly interesting during the Fed press conference this week was the discussion around tariffs. Going into the meetings, we didn’t expect the Fed to actually start to address any of the of the new administration’s policy suggestions. In fact, the tariff situation was the last thing I expected Chair Powell to discuss. While there wasn’t a detailed discussion, there was sufficient talk to suggest that the Fed is already thinking about formulating policy responses.

And the Fed is not the only one. When the ECB had their press conference on 12 Dec, President Lagarde also discussed the potential tariffs that the US may levy, not just on China but also on the rest of the world. Both Central Bank heads talked about uncertainty and the fact that there may be retaliatory tariffs that could potentially lead to higher inflation. President Lagarde clearly said that this would put a strain on global trade, and consequently growth.

The Proposed Tariffs and Implementation

The proposed tariffs are a 60% blanket tariff on China and a 10% tariff on the rest of the world. While these scenarios are likely extreme, some level of tariff enforcement is expected. According to research from Barclays, this is could raise the average tariff on imports from 2% currently to 17%, a level last seen in the 1930s. The previous tariffs took 11 months to implement during the previous administration, and it’s quite likely that any level of tariffs would take just as long, if not longer.

There have also been discussions now for 20-25% tariffs on Mexico and Canada, and this could put a strain on the economy.

An argument in favor of the Tariffs is that it may actually bring in about $3.8T in revenue to the US government and that could fund some of the fiscal spending initiatives, including replacing some of the lost revenue from lower taxes.

Nevertheless, there’s a long list of research sources that have modeled the impact on the US economy and agree that there will be a drag on economic growth. The decline is amplified if there is retaliation from the foreign counterparts.

How these tariffs will be implemented will be of utmost importance.

Firstly, it’s quite likely that these are negotiating stances, and we won’t see the implementation done at the level being discussed.

Secondly, there will likely be nuanced implementation. So no blanket enforcement.

Finally, I think there will be a great many exemptions.

While protectionism is important for domestic manufacturing growth and fits right in with the agenda of “Make America Great Again”, there are practical considerations that will be taken into account. Not everything can be made in the US, and if that’s the case, it increases the prices of domestic goods, which is not the target here.

Time will tell how this plays out, but I doubt it will be as simple as blanket tariffs for everyone.

Teal Book Reports from 2018

One other interesting aspect is Fed Chair Powell’s mention of the Teal Book. There have been two research reports that were published back in 2018 - one in September and the other in December that looked into the situation with Tariffs under the previous Trump Administration. Here are some of the high-level findings from the December report:

1. Tariffs Being Implemented

The U.S. imposed tariffs equivalent to an effective rate of 14.6% on approximately $280 billion of imports, representing about 13% of non-oil goods imports. Major trading partners, including China, retaliated with tariffs affecting around 8% of U.S. goods exports.

2. Impact of Tariffs on the U.S. Economy

Tariffs are projected to lower the level of U.S. real GDP by about 0.2% by the end of 2021 and slightly raise the unemployment rate by 0.1 percentage points. They are also expected to increase core PCE prices by 0.1–0.2% by 2020. Future potential tariffs were not included in the forecast but remain a key economic risk.

3. FOMC’s Policy Response to Tariffs

The FOMC’s baseline projection includes a modest boost to core inflation due to tariffs. However, their monetary policy actions, such as gradual rate hikes, focus more broadly on managing inflation and resource utilization. The risks from tariffs are acknowledged but are not the primary driver of their policy stance.

4. Rates and the U.S. Dollar

The FOMC projects the federal funds rate to rise steadily over the next few years, potentially reaching 4.7% by 2021. The U.S. dollar is expected to appreciate gradually as expectations for the federal funds rate align with the FOMC’s trajectory. This appreciation reflects monetary tightening and economic resilience.

5. Foreign Response and Economic Activity

Foreign GDP growth is expected to moderate in the near term due to weaker momentum, lower oil prices, and policy concerns in countries like Mexico. Tariff impacts, coupled with retaliatory measures, create ongoing risks for global trade. The PBOC and other central banks have taken accommodative stances, but trade tensions remain a drag on economic activity.

Closing Thoughts - Keyword: Uncertainy

We’ve had meetings across other central banks as well, and the “central” theme has been “uncertainty”. For what it’s worth, this is exactly what we talked about in our Global Outlook for 2025. The reason we called it Shifting Sands, is because we have this sense of…. uncertainty. There are so many changes that have taken place this year, the impact of which will start to show up next year. But most importantly, we don’t even know exactly what those changes will bring.

Have a great week ahead!

None of the above is investment advice. To learn more, please visit www.macrovisor.com