Investing.com – President-elect Donald Trump has promised to impose tariffs of as much as 10% on global imports into the US and 60% on items coming from China, as well as an additional 25% on products from Canada and Mexico.
Many investors, who initially welcomed the prospect of looser regulation and tax cuts during Trump’s second term in the White House, have expressed concern that the tariffs could reignite inflationary pressures, strain the Treasury and ultimately limit the scope for Federal Reserve policymakers. more interest rate cuts.
Minutes from the Fed’s December meeting released earlier this week showed that central bank staff were uncertain about the impact of Trump’s plans for sweeping import tariffs and mass deportations on inflation.
Fed officials were particularly concerned that the recent cooling in price increases could be affected by Trump’s policy changes, noting that the process of reducing inflation to the Fed’s ultimate target of 2% “could take longer than previously expected.”
Those fears, along with the Federal Open Market Committee already cutting interest rates by a full percentage point in 2024, convinced some members to opt for a “cautious” approach to further cuts this year, the minutes said.
Following the announcement, bets that the Fed will leave borrowing costs unchanged at the next few upcoming meetings have strengthened, with the first tapering now not expected before May at the earliest.
Broader uncertainty in markets heightened Wednesday after CNN reported that Trump was considering declaring a national economic emergency to secure legal support for the tariffs. Earlier this week, Trump also denied a separate report that his team was considering reducing tariffs to cover only critical goods.
It is not the first time Trump has taken a hostile stance on international trade policy. During his previous term, Trump launched a tariff dispute with China in 2018 over what his administration considered unfair trade practices.
But in a note to clients, UBS analysts led by Matthew Mish argued that Trump’s latest tariff plans could be bad “on the net” for global credit activity.
“The environment for loans going into ‘Trump 2.0’ is very different than in 2017: margins are significantly tighter, global growth is expected to slow, and sensitivity to inflationary shocks is greater,” Mish wrote. “The setting in 2025 is more like 2018, with little buffers for tariff or geopolitical shocks.”
Mish added that while debt defaults should “remain broadly stable” in the US, slowing growth and refinancing needs should increase defaults in the European Union.
“Tariffs and geopolitical tensions are likely to affect EU credit more than the US.” Mish said.
