MNI INTERVIEW: US Tariffs To Hit Growth, Prompt Fed Cuts-Wang
Sweeping tariffs from the Trump administration are set to harm growth while having an ambiguous impact on inflation and will ultimately induce more rate cuts from the Federal Reserve, Joseph Wang, former senior trader on the New York Fed's open market desk, told MNI.
"Growth concerns will dominate inflation concerns, leading to rate cuts," Wang said in an interview. "The administration has been very clear they view tariffs as a means to raise revenue, and that's not being taken seriously by markets. If that's the case, we should expect tariffs to be higher and more structural."
His view of a more dovish Fed outlook runs counter to growing expectations for a prolonged pause in the face of stickier consumer prices. (See MNI: Fed In Holding Pattern As Inflation To Stay High-Ex-Staff)
Before the election, Trump promised to levy tariffs of 10%-20% on all imported goods and as much as 60% on goods from China to reduce America's trade deficit and revive domestic manufacturing. He's implemented his agenda in rapid-fire fashion in his first month: a 25% tariff on steel and aluminum imports, 25% on Canada and Mexico, 10% on China and a plan for reciprocal measures on a broad range of countries – setting up for a far wider trade conflict than in his first term.
"In 2018-2019, growth concerns were much higher than inflation concern, leading to rate cuts in 2019," said Wang, author of the research blog fedguy.com. "This time around the difference is the tariffs look like they’re going to be much bigger. It’ll be an all out war with many people. In addition to that we’re having some success in cutting government spending through DOGE, so that again weakens growth." (See: MNI INTERVIEW: Lots More Coming On Trump Tariffs - Eissenstat)
REVENUE GENERATING
DOGE, the Elon Musk-led team charged with downsizing the federal government, has frozen federal grants and hiring and terminated thousands of employees. Wang estimates a loss of 200,000 jobs over two years from attrition alone and likely more depending on the outcomes of various legal challenges. "It's a structural decline that will tighten the labor market," he said.
The task force also plans to slash the costly F-35 fighter jet program and find ways to eliminate the estimated USD200 billion to USD500 billion a year in federal spending lost to fraud, Wang said. "That could result in USD100 billion to USD200 billion in cuts that are within their legal rights – and easily more than that."
The White House will need all of that plus the tariffs revenue if it is to meet its goal of reducing the deficit to 3% of GDP from 6% now and renew Trump's first-term tax cuts, Wang said. The nonpartisan Tax Policy Center estimates 25% tariffs on Mexico and Canada would raise USD111 billion in federal revenues in 2026 and generate USD1 trillion over 10 years.
"DOGE is doing some part but we also need extra revenue, and that’s where the tariffs come in," Wang said.
INFLATION MAYBE
An acceleration in inflation is possible but not assured, Wang said, citing the offsetting factor of a stronger dollar and potential compression in importer margins like in 2018-19.
"Companies in earnings reports are already talking about the consumer being maxed out. Consumers could also substitute away to other products that are less expensive," Wang said.
Surveys have also found a partisan divide in expectations about who will bear the costs of tariffs, which Fed officials will note, he said. "All this tells me that inflation impacts are more ambiguous than that of growth."