Fed Warns Tariffs Could Spark Persistent Inflation

The Federal Reserve's primary concern regarding tariffs is the potential for a sustained price shock that could disrupt the economy. A sharp rise in long-term inflation expectations would indicate a loss of confidence in the Fed's ability to control inflation and bring it back to the target rate of 2%. This scenario would be particularly worrisome for the central bank, as it could signal a more persistent increase in prices that would be difficult to reverse.

The Trump administration's ambitious goal of striking 90 trade deals in 90 days has raised doubts among trade experts about the feasibility of such an undertaking. The administration's top tariff negotiator, Treasury Secretary Scott Bessent, was notably absent from Washington during a critical negotiation period, highlighting the logistical challenges of managing multiple simultaneous negotiations. The absence of key officials and the lack of clarity on US trade positions have further complicated the process.

The administration's efforts to regain the confidence of financial markets are crucial during this period. Investors have been selling US Treasury debt, leading to spikes in interest rates and a decline in the dollar's value. This turmoil has put pressure on the Trump team to deliver quick wins and demonstrate that they can conclude agreements with countries, thereby instilling confidence in the market and with other trading partners.

The administration's approach to trade negotiations has been characterized by a lack of coordination and clarity. Many key positions remain unfilled, and officials are often stretched thin, dealing with multiple tasks simultaneously. The uncertainty surrounding US trade positions has made it difficult for other countries to engage in meaningful negotiations. Some countries, including Britain and Australia, have been discussing trade with the administration since Trump's inauguration, but with little concrete progress.

The administration's strategy of exempting certain products, such as phones, computers, and chips, from 'reciprocal' tariffs has been seen as a way to mitigate the impact of tariffs on consumers and businesses. However, the overall effect of these tariffs on the economy remains a concern, as they could lead to a sustained increase in prices and a loss of confidence in the Fed's ability to control inflation. The administration's approach to trade negotiations has been characterized by a lack of coordination and clarity, making it difficult to predict the outcome of these efforts.