WASHINGTON (Reuters)-US Federal Reserve authorities, who said they needed more details before estimating the economic impact of President Donald Trump’s trade plans, may have obtained more than they expected on Wednesday when he revealed comprehensive tariffs that, reports, they could dramatically change the country’s economic perspectives.
Opportunity:
The rates, which Trump happily displayed as an import tax rates rating table, have a 10% base line for major business partners such as the European Union, even higher at 25% for Canada and Mexico, huge 46% for Vietnam and potentially over 50% for China.
In a few hours, economists were projecting a recession in the US and making comparisons with the 1930s and even the late 1800s at the beginning of the country’s industrial development.
On average, imports can now have a tax of up to 27%, estimated Citi economists, with higher taxes on some types of goods and some countries and minors on others. Less than three months ago, at the end of the presidency of Joe Biden, this rate was about 2.5%.
Read more:
Continues after advertising
If the logic of the detailed plans of the government has escaped many private sector analysts, the implications have already begun to be perceived among the Federal Reserve authorities.
After fighting inflation for two years and almost containing it while maintaining the low unemployment rate, the Fed is now fighting a concept that would rather avoid: stagflation, or a situation where prices and unemployment increase together, as happened in the 1970s.
At the moment, “we are certainly not in a stagflation environment,” said Fed Director Adriana Kugler on Wednesday, in comments made the moment Trump revealed her tariff table.
Continues after advertising
But “we may be in a situation where we are already seeing some risks of high for inflation and some real increases in inflation, at least in some categories… We may be seeing a little slowdown in the future as well,” said Kugler.
“We are paying close attention to how much this slowdown will it mean how high rates for inflation will be performed?”
Stagflation, she said, was “a big word.”
Continues after advertising
“It means really corrosive inflation … and means you have negative economic activity. You have a recession.”
Some economists were already predicting that the economy was walking in this direction and cut off US growth forecasts.
“This is a turnaround that produces recession – if these tariffs remain in force,” wrote economist Steven Blitz from TS Lombard. “Trump’s damage to redefining trade can well create a worse and less healthy result.”
Continues after advertising
US markets have quickly absorbed new risks. Treasuries’ income fell, and the actions of actions yielded sharply.
Members of Fed Lisa Cook and Philip Jefferson are expected to speak on Thursday afternoon, and Fed Chair Jerome Powell will speak on Friday at an event in northern Virginia.
At its last month meeting, the Fed maintained the basic interest rate of stable interest rates, with authorities projecting two 25-base cuts this year amid a slower growth prospect and higher inflation.
Continues after advertising
But Powell acknowledged during a press conference that he and his colleagues may have been abnormally influenced by inertia in their estimates, given how little they could say with confidence over the coming months.
With Trump’s announcement, the situation may have become even more complicated.
“The increasing risks to inflation and employment put the Fed in an even more difficult situation in the future,” wrote Evercore Vice President Krishna Guha, with the “confusing” consequences of tariffs increasing fears among authorities that inflation expectations could begin to increase.
This could leave the Central Bank on hold to maintain price control, or cut quickly if the economy drops.
“At this point, the probability of no cuts, of two or three cuts or more than five in a recession is practically the same,” he said.
