Trump's Tariffs Spark Market Turmoil: Fed's Inflation Gauge Surges

The market is in a state of flux as President Trump's 25% tariffs on imported automobiles and parts take effect. The move, aimed at bolstering U.S. national security and domestic manufacturing, has sent shockwaves through Wall Street, with automakers' stocks tumbling and consumer prices expected to rise. Meanwhile, the Federal Reserve's favorite inflation gauge, the Personal Consumption Expenditures (PCE) index, has surged, raising concerns about the Fed's next move.



The tariffs, which went into effect on April 2, are expected to add thousands of dollars to the cost of imported vehicles and parts. Cox Automotive estimates that tariffs will add $3,000 to the cost of a U.S.-made vehicle and $6,000 to vehicles made in Canada or Mexico without exemptions. This increase in costs will likely be passed on to consumers, leading to higher vehicle prices and potentially reduced sales.

The announcement of the tariffs led to a decline in the stock prices of major automakers. For example, shares of U.S.-listed automakers fell on news of the press conference on concerns that tariffs would send shock waves through a global auto industry that is already reeling from uncertainty caused by Trump's rapid-fire tariff threats and occasional reversals. The U.S. stock market also closed lower on worries over tariffs, with the benchmark S&P 500 Index falling 1.1% ahead of the press conference.

The surge in the PCE index, which rose 0.3% from the prior month and 2.5% on an annual basis in February, has raised concerns about the Fed's next move. The Fed's preferred inflation gauge showed prices rose in February at a pace that continues to exceed the central bank's target level amid its ongoing efforts to tamp down inflation. This persistent inflation could prompt the Fed to consider raising interest rates to cool down the economy and bring inflation back to its target.

The surge in the PCE index could also influence market expectations and increase volatility. The market's expectation is that the Fed will leave rates unchanged for a third straight time when it meets in early May. The probability of rates being held steady was a little more than 90% on Friday, up from over 85% a week ago, according to the CME FedWatch tool. However, if the PCE index continues to rise, this could change market expectations and lead to increased volatility as investors adjust their positions in anticipation of potential rate hikes.

The surge in the PCE index could also impact consumer sentiment and spending, which in turn could affect the broader stock market. The University of Michigan’s Surveys of Consumers showed that consumer sentiment declined in February for the second consecutive month, driven by worries over Trump’s tariffs potentially jacking up prices. This could lead to a decrease in consumer spending, which accounts for a significant portion of the U.S. economy. A decrease in consumer spending could negatively impact corporate earnings and, consequently, the stock market.

The tariffs could also drive costs of cars higher for consumers by thousands of dollars, hitting new vehicle sales and resulting in job losses, since the U.S. automotive industry relies heavily on imported parts, according to the Center for Automotive Research. The U.S. imported $474 billion worth of automotive products in 2024, including passenger cars worth $220 billion. Mexico, Japan, South Korea, Canada and Germany, all close U.S. allies, were the biggest suppliers.

The tariffs could also benefit domestic automakers in the long run by increasing demand for U.S.-made vehicles. However, in the short term, the increased costs and potential reduction in sales could negatively impact both domestic and foreign automakers. Foreign automakers, in particular, may face additional challenges due to the higher costs of importing vehicles and parts.

The tariffs could also lead to a resurgence in inflation, as many economists have voiced concerns that Trump's numerous tariffs announced in recent weeks could reignite inflation by raising prices, especially because consumer expectations of future inflation have shot up in recent weeks, according to surveys. This could lead to a more hawkish stance from the Fed, which could negatively impact the stock market.

In summary, the 25% auto tariffs imposed by President Trump are likely to have a significant impact on the long-term profitability and stock performance of major automakers. While domestic automakers may benefit in the long run, both domestic and foreign automakers will face increased costs, potential reductions in sales, and tough decisions on production and supply chains. The surge in the PCE index could also influence the Fed's monetary policy decisions and, consequently, the broader stock market. The market is in a state of flux as investors try to navigate the uncertainty caused by the tariffs and the Fed's next move.