Trump's Tariffs Could Pose Challenges for the US Economy and the Federal Reserve

US President-elect Donald Trump is once again drawing attention with his strained relationship with Federal Reserve Chair Jerome Powell. In their last encounter, Powell spent months negotiating for fiscal spending increases from Trump and his allies in Congress. This time, however, Trump's new tariffs could present a bigger challenge.

Trump, at 78 years old, has proposed a 10% tariff on all US imports, with a staggering 60% tariff on goods "Made in China." This could significantly impact the American economy, as the tariffs are expected to push consumer prices higher.

The Federal Reserve, led by Powell, is expected to meet today to discuss cutting interest rates by a quarter point. This would continue efforts to ease borrowing costs, as inflation cools and approaches the Fed's 2% target. On September 18, the Fed reduced its federal funds rate target range by half a percentage point, to between 4.75% and 5%, after holding rates steady for over a year.

As Trump prepares to move into the White House, Powell, just a few steps away, will hope that the new president respects the Fed's independence. However, Trump has previously suggested that presidents should have a say in the Fed’s interest-rate policies. In an interview with Bloomberg in October, Trump said he doesn't think he should be able to order the Fed's actions, but that he has the right to comment on the direction of interest rates.

Trump's Tariffs and Their Impact on the Fed's Plans

Now that Trump is set to take office, all eyes are on how his economic policies will interact with the Fed’s plans to cut rates. Many economists had predicted that the Fed might go for another rate cut cycle in December, but confidence in that plan has been shaken after recent developments.

The Tax Foundation, a non-partisan think tank, estimated that Trump's proposed tariffs would raise taxes by $524 billion annually, shrink GDP by at least 0.8%, and potentially lead to a loss of 684,000 full-time equivalent jobs. Retail workers, who make up the largest private sector workforce in the US, could be particularly affected. Trump also plans to impose a 25% tariff on all imports from Mexico.

According to a National Retail Federation study, Trump's tariffs could reduce American consumers' spending power by between $46 billion and $78 billion each year. Many experts worry that these tariffs could worsen inflation and strain the fixed income market in the US.

Experts' Concerns About Trump's Economic Policies

Several experts are concerned that Trump's tariff plans could create a difficult environment for fixed income in the US. “These election results will be really bad for fixed income and can unwind a lot of the bullishness in fixed income,” said Andrzej Skiba, Head of Bluebay US Fixed Income at RBC Global Asset Management. “Trump keeps openly telling people that he will increase tariffs not just on China but with every trade partner. We’re talking 10% tariffs across all global partners. This is a big deal because this could add 1% to inflation. If you add 1% to next year’s inflation numbers, we should say goodbye to rate cuts. With higher tariffs, the Fed will not be in a position to cut rates, even if the economy is slowing down—and that is a toxic mix for fixed income.”

Rogier Quaedvlieg, Senior US Economist at ABN AMRO Research in Amsterdam, also noted that the inflationary effects of Trump's policies may lead to higher US interest rates across the yield curve. "We anticipate that the market will further retrace expectations for Fed rate cuts next year due to increased inflation projections, while also pricing in higher term premiums," Quaedvlieg said. "However, our economic analysis suggests that the full implementation of Trump’s policies, especially the tariffs, will eventually weigh heavily on the US economy."

Quaedvlieg added that Trump's tariffs could also impact the fragile eurozone economy, although the inflationary effects would be more limited. This could lead to an accelerated rate-cutting cycle by the European Central Bank (ECB), further deepening the divergence between US and European policy rates.

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