Trade War Tug-of-War: Markets Fall as Trump Pulls One Way, Fed Another

TLDR

• Trump’s threat of 200% tariffs on EU alcohol imports has pushed the S&P 500 into correction
• Economists at Nomura estimate US effective tariff rates have risen from 2.4% to 10.1%
• Federal Reserve Chair Powell faces pressure to address tariffs’ impact on inflation
• Both Trump and Powell are taking a “wait-and-see” approach despite market concerns
• Business uncertainty about tariff implementation may be more damaging than the tariffs themselves

The stock market entered its first correction since October 2023 as President Donald Trump’s latest round of tariff threats rattled investors. The S&P 500 fell sharply after Trump announced plans for 200% tariffs on alcohol imports from the European Union, which came in response to EU retaliation against US steel and aluminum levies.

This move comes as part of a broader tariff strategy that has seen effective US import tariff rates climb from 2.4% in 2024 to 10.1% currently. Economists at Nomura forecast these rates could rise further to 14% as more tariffs take effect.

The market reaction has been decidedly negative. Investors who had been optimistic about the economy now face new concerns about how these tariffs might affect inflation and economic growth.

Fed Meeting

Federal Reserve Chair Jerome Powell now faces a tough decision ahead of next week’s policy meeting. While the Fed is expected to keep interest rates steady for now, Powell must address how the tariffs might impact future monetary policy.

Powell has previously stated that the central bank could ignore one-time price increases from tariffs. However, the risk grows that these higher costs could become embedded in consumer expectations and lead to more lasting inflation.

Recent inflation reports suggest the Fed’s preferred measure, the core personal consumption expenditures index, will increase to between 2.7% and 2.8% in February. This marks an uptick from January’s 2.65%.

Market traders still expect the possibility of three or more interest rate cuts this year. But this outlook could change depending on how the Fed views the inflation risks from tariffs.

Both Trump and Powell appear to be taking a similar “wait-and-see” approach, though their communication styles differ greatly. Powell has been clear that the Fed can wait before taking action as the tariff situation develops.

Trump has been less transparent. When recently asked to provide clarity to the market, he dismissed concerns about falling stock prices and continued announcing new tariffs.

The president’s approach to tariffs has been both consistent in philosophy and unpredictable in practice. Some countries like Mexico and Canada have received exceptions, while Europe faces new threats.

This unpredictable pattern has created what some describe as “economic paralysis” that affects consumer confidence. Business leaders often say the uncertainty around tariff implementation is more damaging than the tariffs themselves.

Wall Street

Wall Street analysts are struggling to assess the timing and impact of Trump’s announcements. Some suggest that what hurts markets today might actually improve corporate profits later in the year.

Bill Adams, chief economist for Comerica Bank, noted that the Fed’s response depends on whether they focus on current policies or anticipate future fiscal decisions. “If the Fed makes monetary policy decisions based on policies enacted today, they could make substantial cuts to interest rates in 2025,” he said.

The market remains caught between Trump’s “America First” agenda and the Fed’s dual mandate of stable prices and maximum employment. Investors face the uncomfortable reality of short-term pain with uncertain long-term benefits.

As both Trump and Powell maintain their cautious stances, Wall Street waits for clarity. The only certainty for now appears to be continued market volatility and economic uncertainty.