Trump’s Tariff Threats and Fed’s Response #

President-elect Donald Trump has vowed to impose significant tariffs on Mexico, Canada, and China. These proposed actions are expected to impact prices, potentially prompting the Federal Reserve to rethink its interest rate policy. While the effects of Trump’s tariff plans on the economy are not immediately clear, Trump is adamant about implementing a 25% tariff on Mexico and Canada, and an additional 10% duty on Chinese goods upon starting his second term on January 20.

The imposition of tariffs would likely lead to higher prices for imported goods such as avocados, cars, and tequila, affecting an estimated $1.5 trillion worth of goods across North America. Wall Street has expressed concern over potential inflation spikes under Trump’s leadership, with bond yields already seeing an increase as Election Day approaches.

Higher inflation, fueled by these tariffs, would make it difficult for the Fed to lower borrowing costs. The Fed is considering potential retaliatory tariffs and consumer expectations for inflation as part of their economic planning. During Trump’s previous term, the Fed raised rates amid consumer concerns and trade wars, following what was determined to be the best course of action.

There have been indications of potential retaliatory tariffs from other countries, such as Mexico, in response to Trump’s proposed measures. Presently, consumer expectations for inflation in the coming year have decreased significantly.

The current economic environment differs from 2018, although inflation still remains a concern. Consumer expectations have stayed around 3% since May 2021, higher than previous years. The Fed is currently pursuing rate cuts based on low unemployment, steady consumer spending, and slowing inflation, despite recent challenges.

Mortgage rates have risen since the Fed’s initial rate cuts, although officials believe borrowing costs are still high. There are plans for more rate reductions as the Fed aims to ease economic conditions, with concerns persisting about lower-income groups facing challenges due to high interest rates.