In about 10 days (Feb 1st), the tariffs Donald Trump has announced to offset dumping tactics or simply to keep competitiveness of American products, will take effect. For Mexico and Canada, we’re talking about 25% and 10% for Chinese products. In the chart below, you can see the impact of those tariffs can have on headline inflation in the U.S. with a 50% passthrough rate: PCE could be up 80 bps, and potentially kill the expectation of further rate cuts during 2025 and 2026. Tariffs will not necessarily affect directly all products but it may have a spillover effect, and just the fact that we can add almost a point to the accumulated inflation of the last 4 years is concerning. And it’s highly likely that these actions will have an impact on Fed forecasting models and their view of stable prices. If you want a thermometer to measure the impact of tariffs, the Treasury curve will start showing symptoms very quickly, and through market mechanism, it will impact everything else.
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