UBS warns: The expansion of tariffs in the United States may make it more difficult for the Federal Reserve to reduce inflation
UBS Group AG's Arundhati Katju warned that the incoming President Trump’s plan to gradually raise tariffs could pose greater challenges for the Federal Reserve in addressing inflation. He pointed out that tariffs could lead to a one-time shift in price levels and potentially trigger supply shocks, thereby driving up inflation. Katju believes that financial markets have not fully reflected the risks of increased tariffs, and comprehensive tariffs will exert greater pressure on inflation. Investors are closely watching the upcoming U.S. inflation data to assess future monetary policy
According to the Zhitong Finance APP, Arend Kapteyn, the global head of economic and strategic research at UBS Group AG, stated in a television interview with Stephen Engel on Tuesday that U.S. President-elect Donald Trump’s decision to gradually raise tariffs after taking office will be a “problem” for the Federal Reserve, which is dealing with the last mile of inflation. Kapteyn explained, “We believe tariffs are a one-time price level change that will disappear after a year, and as long as the impact of tariffs is not significant, there will be no spillover effects, nor will there be a second-round effect similar to inflation.”
However, he warned: “But if rolling tariffs are implemented, it’s somewhat like a replay of the pandemic and the Ukraine shock we experienced, where you face one supply shock after another, and it starts to create higher peaks of inflation. So I think it will become more difficult for central banks to know how to respond.”
Previously, Bloomberg reported, citing unnamed officials, that members of Trump’s new economic team are discussing a gradual monthly increase in tariffs, aimed at enhancing negotiation leverage while helping to avoid soaring inflation.
Kapteyn stated that he does not believe the financial markets have fully priced in the risks of the U.S. raising tariffs. He emphasized, “We do believe this will lead to inflation,” adding, “And then, of course, it becomes a tariff issue, namely who can be exempt from tariffs, how much can be exempted, and which tariffs can be exempted.”
Kapteyn further pointed out, “If comprehensive tariffs are implemented, the inflationary pressure will be greater than starting to exempt those goods that have no other options.”
Currently, investors are eagerly awaiting the U.S. inflation data to be released on Wednesday, which may show that core prices have only slightly cooled by the end of 2024. This could support the Federal Reserve's approach of slow rate cuts after three cuts last year. The money market expects only one rate cut in 2025.
At the same time, U.S. inflation data increasingly indicates that the process of stabilizing prices has essentially stalled, with little sign of distress in the labor market and demand. Trump’s return to the White House has added uncertainty to the global economic growth and inflation outlook.
Jan Hatzius, chief economist at Goldman Sachs Group, stated in a television interview with reporters that Goldman Sachs predicts the U.S. core inflation rate will be around 2%, very close to the Federal Reserve's target.
He said on Tuesday, “In this environment, I still think there could be a few rate cuts,” adding, “But clearly the FOMC is not in a hurry, which is why we think the first rate cut may have to wait until later in the second quarter, possibly at the June meeting.”
However, he warned that if the inflation rate continues to rise and remains around 3% for the year, the Federal Reserve may not cut rates at all. Hatzius also stated that U.S. tariffs are unlikely to have a “huge impact” on inflation and growth