Evelyn Reynolds

A complicated scenario is emerging surrounding the tariff drama that could put the Fed in an uncomfortable Catch-22, unsure whether to use its policy levers to tame inflation or boost growth.
When Trump launched tariffs during his first term, the Fed was raising rates, and the result, indirectly perhaps, was a manufacturing recession, though one that did not spread to the broader economy.
This time around, the targeted tariffs that Trump had previously used have been replaced by the threat of blanket duties that could change the monetary policy calculus.

Flags outside the Fairmont Royal York in downtown Toronto, Feb. 3, 2025. 
Andrew Francis Wallace | Toronto Star | Getty Images

A complicated scenario is emerging surrounding the tariff drama that could put the Federal Reserve in an uncomfortable Catch-22, unsure whether to use its policy levers to tame inflation or boost growth.
With many bridges to cross yet in President Donald Trump’s efforts to use the levies as a tool both of foreign and economic policy, the central bank will have a delicate balance to strike.

Many economists expect the tariffs both to raise prices and shave the pace of gross domestic product, with the main question being a matter of degree on the extent of any need for Fed policy adjustments.
“Maybe you get that price shock and maybe it’s offset by the dollar going up vs. the currencies of the countries subject to tariffs. But just really the long-term effects tend to be negative for growth,” said Kathy Jones, chief fixed income strategist at Charles Schwab. “You put that combination together and it puts the Fed in a real bind.”
There are a lot of moving parts happening in the dispute Trump is having with China, Canada and Mexico, the three leading U.S. trade partners. As things stand now, threatened duties against Canada and Mexico have been postponed as the president negotiates with leaders of those governments. But the situation with China has quickly escalated into a tit-for-tat conflict that has markets on edge.
A different history
That tariffs cause higher prices is practically an article of faith for economists, though the historical record provides less certainty. The Smoot-Hawley tariffs in 1930, for instance, actually proved to be deflationary as they helped worsen the Great Depression.
When Trump launched tariffs in his first term, inflation was low and the Fed was raising rates as it sought a “neutral” level. A manufacturing recession ensued in 2019, though one that did not spread to the broader economy.

This time around, the targeted tariffs that Trump had previously used have been replaced by the threat of blanket duties that could change the monetary policy calculus. Schwab projects that the tariffs at full strength could cut 1.2% off GDP growth while adding 0.7% to core inflation, pushing the latter measure above 3% in the months ahead.

Broader tariffs “have both more price impact and more growth impact down the road,” Jones said. “So I could see [the Fed] staying on hold longer, with the threat of tariffs hanging over the market and maybe seeing these price increases and then having to pivot to easing later in the year, or next year, or [whenever] that growth impact shows up.”
“But they’re definitely in a tough spot right now, because it’s a two-sided coin,” she added.
Indeed, markets largely expect the Fed to hold tight for at least the next several months as policymakers observe the reality against the rhetoric on tariffs, along with looking for the impact from a full percentage point of interest rate cuts in the final four months of 2024.
If any of the parties blink on tariffs, or if they are less inflationary than thought, the Fed can go back to focusing on the employment side of its dual mandate and pivot away from inflation concerns.
“They’re very comfortably on hold right now, and the back and forth on tariffs won’t impact that, especially since we don’t even know what they’re going to look like,” said Eric Winograd, director of developed market research at AllianceBernstein. “You’re talking multiple months before this will meaningfully impact their thinking.”
‘A lot of uncertainty’
Winograd is among those who think that while tariffs could result in one-off boosts to some prices, they will not generate the kind of underlying inflation that Fed officials look at when making policy.
That matches some of the recent statements from Fed officials, who say that tariffs are likely only to affect their decision-making if they generate a full-blown trade war or somehow contribute to more fundamental supply or demand drivers.
“There’s a lot of uncertainty about how policies unfold, and without knowing what actual policy will be implemented, it’s just really not possible to be too precise about what the likely impacts are going to be,” Boston Fed President Susan Collins told CNBC in an interview on Monday. From a policy perspective, Collins said her current stance is to “be patient, careful, and there’s no urgency for making additional adjustments.”
Market pricing is still pointing to a likely Fed rate cut at the June meeting, then possibly one more quarter percentage point reduction in December. The Fed last week opted to hold the federal funds rate steady in a range between 4.25%-4.5%.
Winograd said he sees a scenario where the Fed can cut two or three times this year, though not starting until later as the tariff situation plays out.
“Given how insulated the U.S. economy generally is from trade frictions, I don’t think it moves the Fed needle very much,” Winograd said. “The market is presuming too mechanical of a reaction function from the Fed where if they see inflation go up, they have to respond to it, which simply isn’t true.” More

Available positions tumbled to 7.6 million, the lowest since September, and below the Dow Jones estimate for 8 million.
Though the JOLTS report runs a month behind other jobs data, the Federal Reserve watches it closely for signs of a slack or tight labor market.

Job openings slid in December while hiring, voluntary quits and layoffs held steady, the Labor Department reported Tuesday.
Available positions tumbled to 7.6 million, the lowest since September, and below the Dow Jones estimate for 8 million, the Bureau of Labor Statistics said in its monthly Job Openings and Labor Turnover Survey. The decline left the ratio of open jobs to available workers at 1.1 to 1.

Though the report runs a month behind other jobs data, the Federal Reserve watches it closely for signs of a slack or tight labor market.
While the net gain in nonfarm payrolls picked up in the month by 256,000, the level of openings fell by 556,000. As a share of the labor force, openings declined to 4.5%, or 0.4 percentage point below November.
Professional and business services saw a drop of 225,000, while private education and health services declined by 194,000, and financial activities decreased by 166,000.
Major stock market averages rose following the news while Treasury yields were mixed as the report showed a relatively healthy labor market as 2024 came to a close.
Layoffs totaled 1.77 million for the month, down just 29,000, while hires nudged up to 5.46 million and quits also saw a small gain to near 3.2 million. Total separations also moved little, at 5.27 million.

The report comes just a few days ahead of the BLS release of the nonfarm payrolls count for January. That is expected to show an addition of 169,000 jobs, with the unemployment rate holding steady at 4.1%.
Fed officials in recent days have expressed caution about the future path of monetary policy as they watch both the impact of a series of interest rate cuts last year as well as fiscal policy involving potential tariffs against the largest U.S. trading partners. The central bank last week opted to hold its benchmark borrowing rate steady at 4.25% to 4.50%, and markets don’t expect further reductions until at least June.

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China’s Finance Ministry said Tuesday it will impose additional tariffs of 15% on coal and liquefied natural gas imports from the U.S., starting Feb. 10.
China will also levy 10% higher duties on American crude oil, farm equipment, and certain cars and trucks, as well as enacting export controls on certain products related to critical minerals.

China unveiled a series of retaliatory measures against the U.S. on Tuesday, shortly after U.S. tariffs on Chinese goods took effect, raising concerns of a broader trade war between the world’s two largest economies.
China’s Finance Ministry said Tuesday it will impose additional tariffs of 15% on coal and liquefied natural gas imports from the U.S. and 10% higher duties on American crude oil, agricultural machinery and certain cars, starting Feb. 10.

China reiterated that the imposition of additional levies of 10% by the U.S. “seriously violates the rules of the World Trade Organization … destructs the normal bilateral economic and trade activities” according to a CNBC translation of the statement in Chinese.
In a separate statement Tuesday, Chinese Commerce Ministry and customs officials announced to impose export controls on a range of items and technologies related to certain critical minerals, including tungsten, tellurium, ruthenium, molybdenum and ruthenium.
China’s tariff announcement is more of a “symbolic move for now,” said Louise Loo, China lead economist at Oxford Economics, who estimates the additional duties could raise the effective tariff rate on U.S. imports into China by close to 2 percentage points.
Loo, however, cautioned that a second U.S.-China trade war was “clearly in the early stage” and sees “a very high likelihood” of further rounds of tariffs from the two countries.

Chinese offshore yuan was little changed against the U.S. dollar, following the announcements. The mainland’s markets, which have remained closed due to the weeklong Lunar New Year holiday, will resume trading Wednesday.

China’s State Administration of Market Regulation also said it has decided to initiate an investigation into Alphabet’s Google as the American technology giant was suspected of violating the country’s anti-monopoly law.
Google pulled its internet and search engine services in China in 2010, but still has some operations focused on Chinese businesses looking to advertise on Google platforms abroad.
“These moves are warnings that China intends to harm US interests if need be but still give China the option to back down,” Julian Evans-Pritchard, head of China economics at Capital Economics, said in a note.
Pritchard acknowledged that the tariffs proposed by China could be postponed or canceled before they come into effect next Monday, and the Google investigation could end without any penalties.
U.S. President Donald Trump on Monday agreed to a 30-day pause on the implementation of the planned 25% tariffs on imports from Canada and Mexico, as the two countries agreed to take steps to prevent the illicit drug trafficking of fentanyl into the U.S.
China, however, did not get any such reprieve.
“The overarching geo-economic dimensions to U.S.-China trade means that resolution will be far more fraught than is the case with Mexico and Canada,” said Vishnu Varathan, head of macro research for Asia ex-Japan at Mizuho Bank.

Swift retaliation

As Trump started his second term, he ordered his administration to investigate Beijing’s compliance with a trade deal struck during his first presidency in 2020. The final result of the assessment will be delivered to Trump by April 1, potentially setting the stage for further tariff actions, economists said.

White House press secretary Karoline Leavitt reportedly said Monday that Trump and Chinese president Xi Jinping could talk “in the next couple of days.”
Trump on Saturday signed into law the long-threatened 10% tariffs against China on top of the existing tariffs of up to 25% on Chinese goods levied during his first presidency.
The additional duties would reduce China’s real gross domestic product growth by 50 basis points this year, economists at Goldman Sachs said in a report Monday, reinforcing calls for stronger domestic stimulus measures to offset impacts from the rising tariffs.
The investment bank expects China’s real GDP growth to slow to 4.5% this year and domestic consumer inflation to rise just 0.4% due to weak demand and a prolonged real estate crisis. More

After a 10 percent tariff on Chinese products took effect on Tuesday, China announced retaliatory measures, including tariffs and an investigation of Google.Beijing responded swiftly on Tuesday to the tariffs President Trump had promised, announcing a fusillade of countermeasures targeting American companies and imports of critical products.Mr. Trump’s 10 percent tariff on all Chinese products went into effect at 12:01 a.m. Tuesday, the result of an executive order issued over the weekend aimed at pressuring Beijing to crack down on fentanyl shipments into the United States.The Chinese government came back with a series of retaliatory steps, including additional tariffs on liquefied natural gas, coal, farm machinery and other products from the United States. It also said it had implemented restrictions on the export of certain critical minerals, many of which are used in the production of high-tech products.In addition, Chinese market regulators said they had launched an antimonopoly investigation into Google. Google is blocked from China’s internet, but the move may disrupt the company’s dealings with Chinese companies.The U.S. tariffs, which Mr. Trump said on Monday were an “opening salvo,” come on top of levies that the president imposed during his first term. Many Chinese products already faced a 10 or 25 percent tariff, and the move adds a 10 percent tariff to more than $400 billion of goods that Americans purchase from China each year.Mr. Trump had been planning to hit America’s three largest trading partners, Canada, Mexico and China, with tariffs of varying degrees. But after days of frantic negotiations, Mr. Trump agreed to pause the tariffs on Mexico and Canada for 30 days after the Canadian and Mexican governments promised to step up their oversight of fentanyl and the border.We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber? Log in.Want all of The Times? Subscribe. More

President Trump is brandishing the U.S. economy like a weapon, threatening to put more than a trillion dollars of trade on the line with economic wars on multiple fronts.In a high-stakes confrontation that lasted over the weekend and into Monday, Mr. Trump promised to put tariffs on the United States’ closest trading partners, which are together responsible for more than 40 percent of American imports, to try to force them to accede to his demands.Mr. Trump was pushing Canada, Mexico and China to stop flows of migrants at the border — one of his major domestic policy issues — as well as to stem shipments of deadly drugs, and offer the United States better terms when it comes to trade relationships.Both Canada and Mexico earned slight reprieves on Monday after Mr. Trump agreed to delay tariffs of 25 percent — which were supposed to go into effect on Tuesday — for a month. That decision came after President Claudia Sheinbaum of Mexico promised to reinforce the U.S.-Mexico border with 10,000 members of its National Guard. Justin Trudeau, the Canadian prime minister, said Canada would appoint a fentanyl czar, launch a joint strike force to combat organized crime and list cartels as terrorists, among other steps.China has not received any such reprieve and Mr. Trump on Monday said that the 10 percent tariffs that will go into effect on Tuesday were simply an “opening salvo.”Speaking from the Oval Office, the president also made clear that he would use tariffs liberally to get other governments to give him what he wants, essentially saying he would leverage America’s economic strength to bully other nations.We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber? Log in.Want all of The Times? Subscribe. More

Europe, you’re next.That’s the latest message from President Trump, who has repeatedly said in recent days that he would slap punitive tariffs on the 27 members of the European Union.Tariffs “will definitely happen with the European Union,” Mr. Trump told the BBC Sunday evening, and they are coming “pretty soon.” He doubled down on the threat on Monday, complaining about deficits in auto and farm products. New tariffs were set to go into effect on imports from Canada, China and Mexico on Tuesday, but on Monday Mexico and Canada were granted a one-month delay.“The European Union has abused the United States for years, and they can’t do that,” Mr. Trump said on Monday.A head-spinning blitz of executive orders and policy reversals related to international trade, aid and agreements has come out of the White House in the past two weeks. But one common thread is that Mr. Trump has directed the harshest penalties at some of America’s closest economic and military allies.One reason is that the United States has large trade deficits with Mexico, Canada and the European Union in addition to China, said Agathe Demarais, a senior policy fellow at the European Council on Foreign Relations.“Trump is obsessed with trade deficits,” she said. And he may be “starting with the places where he feels he will have quick wins.”We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber? Log in.Want all of The Times? Subscribe. More

President Trump’s decision to impose hefty tariffs on Canada, Mexico and China included a little-noticed but significant change to how online purchases will be taxed when they enter the United States.One provision of Mr. Trump’s executive order will increase costs for more than 80 percent of U.S. e-commerce imports. The decision could shift the landscape for online sales from Chinese vendors like Shein and Temu that have swiftly expanded their market share by sending cheap goods into the United States.The president’s order erased a workaround that many companies have taken advantage of in recent years, particularly since Mr. Trump imposed tariffs on Chinese products in his first term. The provision, known as the de minimis exception, allowed certain products that were sent directly to consumers from online platforms to come into the United States without facing tariffs, a huge tax advantage.This obscure provision of trade law underpins major business models. Shein, Temu and many sellers on Amazon have used the de minimis exemption to bypass tariffs. The exemption allows packages to be shipped from other countries without paying tariffs, as long as the shipments do not exceed $800 per recipient per day.But critics say the de minimis measure has also helped fuel an American drug crisis. Importers who use de minimis do not have to provide as much information to U.S. Customs and Border Protection as they do with other packages, for ease of processing. That means drugs and the precursors used to make them could be more easily shipped into the United States without the government catching them.De minimis stems from a century-old trade law that was originally intended for shipments that would be too trivial to merit the attention of customs. But the use of this provision has exploded in popularity.We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber? Log in.Want all of The Times? Subscribe. More

President Donald Trump commended the Federal Reserve for its decision last week to leave interest rates unchanged.
“Holding the rates at this point was the right thing to do,” he told reporters.

U.S. President Donald Trump looks on as he signs an executive order in the Oval Office at the White House in Washington, U.S., Jan. 31, 2025. 
Carlos Barria | Reuters

President Donald Trump agreed with the Federal Reserve for its decision last week to leave interest rates unchanged, an early pivot from his previous demand that the central bank ease “immediately.”
In an exchange with reporters Sunday, Trump said holding its key borrowing level in a range between 4.25%-4.5% was the correct move for the Fed.

“I’m not surprised,” he said regarding the decision, according to multiple reports. “Holding the rates at this point was the right thing to do.”
The statement stood in stark contrast to one Trump delivered when speaking remotely to the World Economic Forum in Davos, Switzerland. In a Jan. 23 appearance, Trump said he would “demand that interest rates drop immediately.”
The president has no direct authority over the Fed, though he does nominate the chairman as well as other board members. Current Chair Jerome Powell is a Trump nominee, and a frequent target of the president’s criticism.
Markets don’t expect the Fed to lower rates until at least June. In his post-meeting news conference last Wednesday, Powell repeatedly asserted that the Fed doesn’t need to be in a “hurry” to lower further after shaving a full percentage point off the fed funds rate from September to December in 2024.
The Fed’s decision-making got potentially more complicated after Trump on Saturday said he would impose aggressive tariffs against Canada, Mexico and China, the three largest U.S. trading partners. Economists worry that the tariffs will drive up prices at a time when inflation has shown signs of easing.

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