Trump's radical tariff policy raises the risk of stagflation in the U.S. economy, pushing the Federal Reserve into a dilemma that may leave officials in a wait-and-see mode.
According to CCTV News, on April 2 local time, Trump signed two executive orders regarding the so-called &#34;reciprocal tariffs&#34; at the White House, announcing a 10% &#34;minimum benchmark tariff&#34; on trade partners and imposing higher tariffs on certain trading partners.
Bloomberg economists estimate that the new tariffs could raise the average effective tariff rate in the U.S. from 2.3% in 2024 to about 22%. Omair Sharif, president of Inflation Insights LLC, calculated a level between 25% and 30%.
On one hand, the tariffs have heightened concerns about a slowdown in the U.S. economy. Following the announcement, investors increased their bets that the Federal Reserve would cut interest rates at least three times this year.
KPMG Chief Economist Diane Swonk stated that the tariffs have increased the likelihood of a slowdown in the U.S. economy, saying, &#34;This is basically our worst-case scenario.&#34;
Joseph Brusuelas, Chief Economist at RSM US LLP, believes that the new tax regime is much harsher than many analysts expected and will increase the probability of the U.S. falling into recession.
On the other hand, some analysts argue that for Federal Reserve officials still struggling to control inflation, the inflationary impact of the tariffs may limit policymakers' ability to support the economy.
&#34;This puts the Federal Reserve in a dilemma,&#34; said Jay Bryson, Chief Economist at Wells Fargo. &#34;On one hand, if growth slows and unemployment rises, they want to adopt a more accommodative policy and hope to cut rates. On the other hand, if inflation rises from here, they want to raise rates. This really puts them in a very difficult position.&#34;
Brusuelas expects U.S. inflation to reach a range of 3% to 4% by the end of the year and believes that the Federal Reserve is unlikely to provide a buffer for the economy through rate cuts in the short to medium term, stating, &#34;The actions taken by the White House today put the Federal Reserve in a more difficult position, as both of its dual mandates are under pressure.&#34;
According to estimates from CICC Research, this policy could push U.S. PCE inflation up by 1.9 percentage points while reducing real GDP growth by 1.3 percentage points, creating a typical stagflation dilemma. For investors, this means the Federal Reserve cannot easily cut rates to respond to an economic slowdown, nor can it easily raise rates to combat inflation, leading to significantly increased market volatility.
<h2>Economic Chain Reaction</h2>
Trump's trade policy had already sparked concerns among the American public about rising inflation before its official announcement on Wednesday, undermining consumer and business confidence.
A survey by the University of Michigan showed that consumer expectations for inflation over the next 5 to 10 years rose to the highest level in over 30 years in March, while personal financial outlooks fell to a historical low. Many business leaders are in a wait-and-see mode, delaying investment plans until the tariff policy and tax legislation outlook become clearer
Multiple economists have warned that the back-and-forth imposition of retaliatory tariffs with major trading partners could significantly escalate trade tensions, thereby slowing down economic activity in the United States and globally.
Seth Carpenter, Chief Global Economist at Morgan Stanley, stated in a media interview, &#34;If an escalation scenario occurs, we are essentially talking about economies around the world fundamentally becoming less productive. This is not a zero-sum game; it could actually be a net loss for the entire global order.&#34;
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Trump's tariff policy has increased the risk of stagflation in the U.S. economy, putting the Federal Reserve in a dilemma. New tariffs could raise the average effective tariff rate in the U.S. from 2.3% in 2024 to about 22%. Analysts expect this will increase the likelihood of an economic slowdown and recession in the U.S., while also potentially limiting the Federal Reserve's ability to support the economy. Experts point out that the tariff policy will drive up inflation and reduce GDP growth, making it difficult for the Federal Reserve to choose between cutting and raising interest rates

- Trump's new tariff policy raises the risk of stagflation in the U.S. economy and complicates the Federal Reserve's decision-making.  
- The implementation of a 10% minimum benchmark tariff could increase the average effective tariff rate significantly, leading to heightened concerns about economic slowdown and inflation.  
- Economists warn that retaliatory tariffs may escalate trade tensions, negatively impacting both U.S. and global economic activity, while consumer confidence has already begun to decline.