Trump's trade war risks undermining his hopes of hefty US interest rate cuts
The ongoing trade war, a signature policy of Donald Trump, risks undermining his aspirations for substantial interest rate cuts this year. This is despite the Supreme Court's rejection of his sweeping global tariffs, which were estimated to have generated approximately $110 billion in revenue from American importers. The City consultancy Capital Economics has calculated that raising the global tariff to 15% will result in an effective tariff rate of 14.5%, slightly above pre-Supreme Court levels, leading to higher prices for American importers and a potential inflationary impact.
The trade war's primary objective is to stimulate prosperity and long-term opportunity by attracting more investment and innovation to the US, thereby boosting incomes. However, it has also created lucrative tax opportunities for the government. The rejected tariffs, estimated to have raked in around $110 billion, have sparked a demand for refunds from companies who paid IEEPA tariffs, potentially providing a fiscal stimulus if they receive their money back. This development poses a challenge for the US Federal Reserve and its new leader, Kevin Warsh, making it harder to justify interest rate cuts.
Trump's desire for substantial interest rate cuts is clear, but the Federal Reserve appears divided. Some officials suggest that rate increases might be necessary to control inflation, while others anticipate cuts. A rate rise from the Fed would likely anger Trump, who has previously expressed frustration with market downturns during periods of positive economic news. This 'good news is bad news' mechanism is crucial for healthy financial markets, as central banks should prevent excessive growth and inflation through tighter monetary policy.
The Trump administration's approach to monetary policy is reminiscent of Alan Greenspan's resistance to rate increases during the 1990s technology boom, which led to an era of cheap money and the dot-com crash. However, the current economic landscape differs significantly from the 1990s, with potential challenges in replicating the bullish macroeconomic conditions of that era. Experts like Dario Perkins of TS Lombard caution that tariffs and immigration curbs have impacted US supply potential, and the 'crowding in' of private sector investment remains a mere rhetoric.
The Federal Reserve's favored inflation measure has risen, dampening deflationary hopes. Market expectations indicate virtually no chance of a Fed rate cut in March, despite predictions of two cuts by Christmas. The policy uncertainty surrounding the next Fed chair, Kevin Warsh, adds to the challenges. Warsh's approach to forward guidance and the economy's current state, marked by slowed growth and limited job creation, may influence his decisions. The risk of a weakened US dollar and broader market instability in 2026 is a concern, and Warsh may face difficulties in persuading the interest rate-setting committee to vote for cuts.
In conclusion, Trump's trade war, while a significant policy, may inadvertently hinder his goal of substantial interest rate cuts. The economic landscape is complex, and the next Fed chair's decisions will play a crucial role in shaping the US economy's trajectory.
