On a day when U.S. economic tailwinds were highlighted by the new Federal Reserve chairman and evident in several reports, President Donald Trump decided to add a headwind.
Trump said the U.S. will impose tariffs of 25 percent on imported steel and 10 percent on aluminum for “a long period of time.” Stocks and Treasury yields tumbled on concern that the move could spark a trade war and hold back the economy, with shares of big exporters such as Boeing Co. and United Technologies Corp. among those hit hard.
“It’s a really bad idea -- how bad depends on what the the rest of the world does in response,” said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania.
Trump’s announcement came after data released Thursday morning showed recent tax cuts buoyed Americans’ spending power in January, unemployment claims fell last week to an almost five-decade low and factories expanded in February at the fastest rate since 2004. Over on Capitol Hill, Fed Chairman Jerome Powell reiterated to lawmakers that “some of the headwinds the U.S. economy faced in previous years have turned into tailwinds,” including fiscal policy and demand for U.S. exports.
The tariffs could reduce U.S. growth by as much as 0.2 percentage point this year, and further risk lies in how trading partners respond, Barclays Plc economists said. While a tight job market and tax cuts are likely to keep America’s expansion humming along, the trade tensions could weigh on growth and boost inflation more than desired by Fed policy makers.
Zandi said that while the tariffs alone may have only minimal effects on U.S. growth and inflation, “I can’t imagine the rest of the world is going to stand still for very long. The scenarios you can construct can get pretty dark pretty quickly.”
Imposing tariffs would open a new chapter in the long-running tension between Trump’s growth-boosting policies -- such as tax cuts and reduced regulation -- and his trade and immigration proposals, which economists generally see as restricting growth.
Interest Rates
Higher inflation resulting from tariffs and follow-up actions could also push central bankers to raise interest rates at a faster pace.
“Raising trade barriers would risk setting off a trade war, which could damage economic growth prospects around the world,” New York Fed President William Dudley said in Brazil on Thursday. “If tariffs go up, it will, at the margin, tend to put more upward pressure on prices, and those upward pressure on prices will have to be considered by the monetary authority.”