Markets are examining what's next for the US economy after the Federal Reserve indicated it expects higher inflation than anticipated.
Pangea Policy founder Terry Haines outlines three factors for investors to consider when developing their inflation expectations: Fed Chair Jerome Powell's remarks; comments from Treasury Secretary Scott Bessent, Commerce Secretary Howard Lutnick, and President Trump indicating that the pros of tariffs outweigh the cons; and the market's expectations.
To watch more expert insights and analysis on the latest market action, check out more Catalysts here.
It can be the case that it's appropriate sometimes to look through inflation if it's going to go away quickly without action by uh by us if it's transitory, and that can be the case in the case of uh of of tariff inflation.
Transitory is back. That was Fed chair J. Powell addressing the uncertainty that's looming over the FOMC amid changing policy coming from the White House. President Trump reacting to Powell's presser on truth social saying quote, the Fed would be much better off cutting rates as the US tariffs start to transition and ease their way into the economy. For more on what's next here, we have Terry Haynes. He is the founder of Pangeo policy. Terry, great to have you on here. Just want to get a sense of what you're telling clients about whether or not tariffs and the inflationary impact of those tariffs are transitory.
Well, I think you got three things here. You have, uh, uh, you have, uh, what Powell said, which I won't repeat since you've just, uh, you've just run it. Uh, secondly, uh, I think you've got, uh, what the Trump advisors say, which is, uh, you know, the Trump Bessen Ludwig, I think are all, uh, saying that, uh, any impact from tariffs are far outweighed by the rest of the economic policy agenda that comes later this year, uh, tax cuts, uh, pumping up manufacturing, deregulation, energy dominance, as they call it, uh, uh, defense spending and so on. So you've got that. And finally, you know, I think the markets believe that as well, but what the markets are frustrated about is, uh, is frankly the timing that, uh, you've got kind of a markets, excuse me, a tariffs negative unknown on the early side with the, uh, the vast majority of the good stuff coming later.
So talk to me about that good stuff coming later. What are you telling clients about how likely that is? Because obviously the good stuff we're referring to is the tax cuts, but there's concern that it's just going to be an extension of the same. And if we don't get more depth and tax cuts that the market is not going to be happy.
Well, my call right now is that it's, uh, 80% likely that the market sees tax cuts in the fourth quarter of calendar 2025. Uh, not only that, but the tax cuts are going to be very, very big, uh, because what, what Congress is moving towards now, and I've been talking to, to markets about this for a while, and it's only recently that, uh, outlets like the Wall Street Journal have started to pick this up as well, uh, is that they're going to move to a, uh, what they call a current policy tax cut baseline, uh, that essentially allows them to, to, to cost this thing at zero, which means that the tax cuts for maximized and the pay fors are minimized. So, uh, they're going to, they're going to push for that. And another reason why I say it's going to be 80% likely is because you can look at the government shutdown, uh, business of last week as kind of a dress rehearsal. And what you saw is Trump and Republicans staying together. And, uh, I think, uh, markets took from that, uh, a, a positive sign that, uh, these folks are serious about moving the rest of the economic agenda forward.
