Economy

More stories

  • 88 Shares129 Views

    in Economy

    FirstFT: China hits back against Trump’s tariffs

    by

    $99 for your first yearFT newspaper delivered Monday-Saturday, plus FT Digital Edition delivered to your device Monday-Saturday.What’s included Weekday Print EditionFT WeekendFT Digital EditionGlobal news & analysisExpert opinionSpecial featuresExclusive FT analysis More

  • 200 Shares179 Views

    in Economy

    The Fed could find itself in a policy Catch-22 if tariffs spike inflation and slow growth

    by

    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    This time around, the targeted tariffs that Trump had previously used have been replaced by the threat of blanket duties that could change the monetary policy calculus.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

  • 138 Shares169 Views

    in Economy

    Job openings decline sharply in December to 7.6 million, below forecast

    by

    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.

    Don’t miss these insights from CNBC PRO More

  • 188 Shares169 Views

    in Economy

    Trump brings the US back from the brink of trade war with Canada and Mexico

    by

    This is an on-site version of the White House Watch newsletter. You can read the previous edition here. Sign up for free here to get it on Tuesdays and Thursdays. Email us at whitehousewatch@ft.comGood morning and welcome to White House Watch! President Donald Trump is set to host Israeli Prime Minister Benjamin Netanyahu today, with their discussion expected to focus on whether the temporary truce in Gaza will become a permanent ceasefire. Until then, let’s get into:Trump’s tariff rollercoasterA potential electricity crisisCompanies cosying up to MuskAfter Trump took Mexico and Canada to the brink of trade wars, both nations have managed to defuse his tariff bombs. (At least, for now . . . )Trump halted sweeping tariffs on the US’s two biggest trading partners after separate bilateral phone calls with Mexican President Claudia Sheinbaum and Canadian Prime Minister Justin Trudeau.While the White House tried to frame the deals as concessions by Mexico City and Ottawa, for Trump the pauses represent significant climbdowns — and not the first of his nascent second term.To placate Trump, both Sheinbaum and Trudeau agreed to put 10,000 personnel at their respective borders to stem the flow of migrants and drugs. With this they secured a 30-day reprieve from levies that would have affected hundreds of billions of dollars a year in trade. In the interim, the US president will dispatch his secretaries of Treasury, commerce and state to hold talks with high-level Mexican officials on trade and security. Meanwhile, the month-long delay on Canadian levies will expire during Trudeau’s final days in office, setting up another round of uncertain negotiations. Markets whipsawed yesterday as the US stood on the edge of a new age of protectionism that unnerved allies and investors. However, stocks managed to recoup heavy losses after the tariff delays. “My head hurts,” said one FX trader at a large European bank. “[It was] almost impossible to trade, [there was] too much [news] to process. Buy. No wait, sell. No, actually buy. [Or] just give up,” the person added.This was on top of the frenzy that took North America by storm over the weekend when panic and anger engulfed Mexico and Canada, sparking a huge backlash from business and a new wave of economic patriotism in Canada.Mark your calendars for early March, when we could do this all over again.What questions do you have about Trump’s trade agenda? Write to us at whitehousewatch@ft.com with your name and location and we may answer them in a future newsletter.The latest headlinesSome content could not load. Check your internet connection or browser settings.What we’re hearingCorporate America is strengthening ties with Elon Musk’s companies and cutting deals with them left and right, as the world’s richest man solidifies his power within the Trump administration.There has been a rush of moves in recent days from the likes of Visa, United Airlines, Amazon, Apple and Oracle. Boeing’s chief executive Kelly Ortberg said he had been working with Musk — a direct competitor in the defence and space industries — to speed up delivery of new Air Force One jets, while JPMorgan’s chief Jamie Dimon told CNBC that he and Musk had “hugged it out” after a years-long feud.Some of the groups’ deals with Musk’s businesses were already in motion, but “there is likely political benefit to a firm accelerating those relationships”, said Jonathan Bundy, a management professor at Arizona State University.Pulling out of or delaying agreements with Musk’s businesses could also bring retribution from the billionaire, said a Washington lobbyist who represents several multinationals, citing Musk’s criticism of OpenAI.Richard Aboulafia, managing director at AeroDynamic Advisory, said Musk might be able to improve industrial processes at Boeing, but was sceptical about his involvement with the Air Force One planes.“Oligarchy is bad enough,” he said. “But oligarchy with a competitor doing the enforcement is double, triple as bad.”ViewpointsRecommended newsletters for youFT Exclusive — Be the first to see exclusive FT scoops, features, analysis and investigations. Sign up hereBreaking News — Be alerted to the latest stories as soon as they’re published. Sign up here More