While the latest Consumer Price Index (CPI) reading saw inflation rise lower than economists' expectations for February, how are the Trump administration's tariff policies figuring into current economist forecasts?
Interactive Brokers senior economist José Torres comes on Market Domination to have a conversation with Julie Hyman and Josh Lipton on the impacts of extensive import tariffs and how its fits into the Federal Reserve's fiscal policy pathway.
Federal officials will be convening in Washington, D.C. next week for their March FOMC meeting, where they will unveil their latest decision around interest rates on March 19.
To watch more expert insights and analysis on the latest market action, check out more Market Domination here.
Uh Jose, I'm just curious as an economist, how you're thinking through tariffs and the potential impact there on that inflation trajectory ahead.
Sure, Josh. Great to see you. Well, you know, a lot depends on the extent and duration of the tariffs, right? Uh a 50% tariff won't have much of an impact if it only lasts one day, but if it lasts six months or so, then the impacts are much more significant. Now, starting the year, my economic growth forecast for 25 was at 3.3%, but in light of the heightening trade tensions and the talk continuing to become increasingly uh confrontational, my forecast now is down to 2%. You're seeing market volatility. Corporate fundamentals could be in question. Uh inflation can very well, we can see CPI back into three and a half, 4% year over year in the span of the next six months. So that would be very worrisome because that'll sort of take away the Fed put and sense and take away the option for the central bank to come in and maybe start to support markets. However, our prediction markets, IBKR forecast trader, still believe that we're going to get roughly three rate cuts this year.
I guess the question is with rate cuts, how much can that offset the effect of, you know, it's always it's hard to tell if you are entering an economic slowdown or a recession, how much does does the Fed cutting offset that?
Sure. I mean, we've seen historically that if the Fed provides accommodation on a monetary policy side and then the fiscal side also offers some stimulus, that those forces could be quite buoyant, you know. I mean, immediately after the pandemic, we saw that those measures really pushed economic growth north by a lot and produced elevated asset prices, you know, in stocks and bonds as well as in real estate and and other assets. So, you know, the Fed coming to the rescue is is definitely going to lift economic prospects, shall they begin to weaken considerably. Remember in 2018, 19 period, the Fed started reducing rates and economic growth in one in the third quarter of 2019 ramped up to almost 5%, you know. So those are really, really powerful factors. However, we're in a new regime now. If the Fed cuts, that's probably going to generate inflationary pressures. So that's the path of least resistance for policy makers is accepting inflation instead of an economic slowdown.
