Rolling US tariffs would be ‘problematic’ for Fed, says UBS

Sydney – A decision by US President-elect Donald Trump to ramp up tariffs gradually once he takes office would be “problematic” for the Federal Reserve as it battles the last-mile of inflation, according to Dr Arend Kapteyn at UBS.

“We think of tariffs as a one-off price level shift, and then it goes away a year later, and then provided it’s not big enough you don’t have spillover effects so you don’t get second round effects that are sort of inflationary,” Dr Kapteyn, UBS global head of economics and strategy research, said on Jan 14 in a television interview with Mr Stephen Engle in Shanghai. 

“But if you do rolling tariffs, it’s a little like the repeat of the pandemic and the Ukraine shock that we had, you have one supply shock after another, and you start to create a much higher peak in inflation, so I think much more difficult to sort of know what to do with that as a central bank,” he said. 

His comments come after Bloomberg reported, citing unidentified officials, that members of Trump’s incoming economic team were discussing

slowly ramping up tariffs month by month

, an approach aimed at boosting negotiating leverage while helping avoid a spike in inflation. 

Dr Kapteyn said he did not believe that the risk of higher US tariffs was priced in by financial markets.

“We do think it’s inflationary,” he said. “And then of course it becomes an issue of tariffs on who and how much and what do you exempt,” he said.

“If you do across-the-board tariffs, it’s much more inflationary than if you start to exempt the things where you have no alternative.”

Investors are now eagerly awaiting US inflation data on Jan 15, which is likely to show that underlying prices cooled only a touch at the close of 2024. That will potentially support a go-slow approach by the Fed after it cut rates three times in 2024. Money market is pricing just one reduction in 2025.

US inflation data is increasingly suggesting that progress towards tamer prices has essentially stalled at a time when the labour market and demand show scant signs of distress. Trump’s return to the White House is adding to uncertainty over the outlook for global growth and inflation.

Goldman Sachs Group is predicting underlying US inflation of around 2 per cent – very close to the Fed’s target, chief economist Jan Hatzius told Bloomberg’s Ms Minmin Low in a TV interview in Hong Kong.

“In that kind of environment, I still think you’re likely to get a couple of cuts,” he said on Jan 14. “But clearly the FOMC (Federal Open Market Committee) is in no hurry and that’s why we think it will take later in the second quarter, probably in the June meeting, for the first cut to be delivered”.

But if inflation proves stickier and stays closer to 3 per cent throughout the year, then the Fed might not cut at all, he added.

Mr Hatzius said US tariffs are unlikely to have a “huge impact” on inflation and growth. BLOOMBERG