Sweeping Tariffs Leave The Fed In An Unenviable Position

On April 2, President Trump announced sweeping tariffs on all U.S. trading partners, and the breadth of the tariffs exceeded market expectations.

During the “Liberation Day” press conference, the President said the country would apply a minimum 10% levy to all imports and even larger tariffs on 60 nations. It hit China the hardest, with a new 34% tariff added to the 20% tariff the White House had already imposed. Southeast Asia was the hardest-hit region, including a 56% tariff on Vietnamese imports. Japan faces a 24% tariff and the European Union 20%.

The previously announced 25% tariffs on automobiles and parts took effect at midnight on April 2, with the remaining tariffs set to take effect during the coming days. White House officials signaled that the maximum levies announced are the starting point for negotiations. Now, we see what retaliatory tariffs other countries will announce.

The initial reaction in global markets was sharply negative. U.S. equity futures traded down 3%-4.5% in the overnight session following the announcement, and Treasury yields 11 to 14 basis points in the 2-year to 10-year part of the curve.

Now we wait for the next steps. The suggestion that the tariffs are very negotiable is unlikely to spark business investment in the coming months — companies will likely be in a wait-and-see mode as it relates to significant capital expenditures given the perceived lack of permanence of the tariffs. As it stands today, the tariffs are expected to have a materially negative impact on global growth and inflation, the duration of the latter more dependent on what retaliatory measures trading partners take.

Will U.S. companies subject to 20%-60% tariffs on products/components be able to pass along the price hike to consumers? If not, how do they respond to compressed margins? The latter would typically involve reducing other costs, such as labor costs via layoffs.

That said, the wild card in all of this is the “negotiation” component and how long these levies will be in place. How much pain is the White House willing to stomach from an economic perspective? The answer could impact the speed and level of concessions in bilateral negotiations.

This represents the biggest trade shift by the United States in a century, and financial markets are expectedly anxious regarding the ultimate impact.

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Jason Haley joined ALM First in 2008 and is the firm’s chief investment officer. He heads ALM First’s Investment Management Group (IMG), which is responsible for leading the investment process and investment theme development. Haley also oversees all capital markets activities, including portfolio management, trading, market research and commentary, and execution of hedging and funding strategies for the firm’s depository clients. He holds an MBA with a concentration in finance and a BBA with a concentration in marketing, both from The University of Mississippi.

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