The Impending Return of the Trade War: Tariffs Back in Focus
While markets may have temporarily breathed a sigh of relief following the Israel-Iran ceasefire, investors are bracing themselves to grapple with another issue that sparked market volatility earlier this year: tariffs.
A Critical Deadline Looms
Morgan Stanley, in a recent report, highlighted that global tariff-related uncertainty remains elevated. Investors are approaching a key deadline that could thrust the trade war back into the spotlight.
On April 9th, then-President Donald Trump announced a 90-day suspension of all reciprocal tariffs. Morgan Stanley points out that July 9th is the next deadline for tariff negotiations. Markets are now waiting to see how the current administration will respond to this next phase. Global markets are heavily influenced by trade policies, and it's crucial for investors to be aware of these developments to make informed decisions.
Three Reasons for Tariff Concerns to Re-emerge
There are three primary reasons why the tariff issue may roar back into investors' consciousness:
- Geopolitical concerns waning: Recent geopolitical events have overshadowed the trade war. However, the risks associated with the Israel-Iran conflict appear to be subsiding. Consequently, a "new chapter" of the Trump-era trade war is the next major volatility threat.
- Lagged impact of tariffs on inflation: Economists are warning that recent data showing cooling inflation may not be sustainable. Morgan Stanley argues that the impact of tariffs on prices may take time to materialize, and they anticipate a rebound in inflation later this summer. Federal Reserve Chairman Jerome Powell has concurred that tariffs will have a noticeable impact on inflation in June, July, and August.
- Complicating Fed policy: Markets, and the previous administration, have been calling for the Federal Reserve to lower interest rates. However, rising inflation would provide the Fed and Powell with another reason to keep rates steady.
The Impact of Tariffs on Fed Decisions
Much of the recent focus has been on the Federal Reserve's decision to hold interest rates steady, a decision that has been met with significant criticism. Powell has indicated that tariffs could ultimately lead to higher inflation, with the burden falling "on the ultimate consumer." However, several Fed officials have recently struck a more dovish tone. Powell and the Fed are facing a complex situation, with rising pressure from both the Federal Reserve and Congress.
As Morgan Stanley points out, trade war-related factors could make the Fed's next decision extremely complicated. Seth B. Carpenter, the bank's chief global economist, wrote, "Some argue, after the weak May CPI data, that the economic impact of tariffs may be mild because of all the ‘negotiations.’ We disagree with this view."
Lagged Inflation and Uncertainty
As analysts point out, tariffs typically lead to higher inflation after two to three months. Therefore, they are not surprised by the recent moderate data and anticipate that the US will see the impact this summer. However, the magnitude and timing of the trade war impact are difficult to predict.
"It is precisely this uncertainty that will make it challenging for the Fed to understand the inflation risks and therefore to decide whether to cut interest rates or not," the analysts wrote.
Disclaimer: This analysis is for informational purposes only and should not be considered investment advice. Investors should consult with a qualified financial advisor before making any investment decisions.
