The United States’ tariff decision in early April has had a multitude of impacts. What are the effects of the shift in trade policy on the markets and the Fed’s operations?
The markets have been reeling following the import tariffs announced by the USA in early April, and some of the tariff decisions have, in fact, already been partially dialled back. The equity markets already had some time to recover from the market plummet in early April, but around Easter, the equity markets fell again.
The dollar has recently depreciated quickly, both against the euro and many other currencies. In Europe, the interest rate level has been falling, while in the USA it has nudged its way slightly upwards.
The Q1 earnings season is kicking off, so far with results coming in mainly from the US banks, showing good earnings. It is likely that, this time round, the markets will focus more strongly on companies’ guidance, outlooks and comments on the new operating environment instead of on the reported figures, as the figures for the first quarter (closing at the end of March) describe the operating environment that preceded the tariff decisions.
The key concern on the equity markets currently appears to be the stalling of economic growth due to the escalating trade war. During April, the United States and China have raised the tariffs they imposed on each other several times. At the same time, the USA has also dialled back several of the tariffs announced in early April. Many countries have, in fact, been given a 90-day pause on new tariffs. The intention is to use this window to hold more detailed trade talks on the final measures.
Furthermore, since the start of April, the United States has also announced that specific product groups will be exempt from the set tariffs. For example, electronics and various car parts will not be subject to new higher tariffs, for the time being.
These announcements have improved market sentiment. The markets appear to have interpreted that the tariffs announced in early April will probably not be final. However, companies are being clearly more cautious in their investments due to the shift in trade policy, as nobody knows as yet what the final tariffs and their impacts will be. If investments are delayed significantly, economic growth will also slow down as a result.
A key factor behind the depreciating dollar is considered to be the growing criticism directed by US President Donald Trump at the Fed’s Chair Jerome Powell. Trump has repeatedly attacked Powell because the central bank has refused to lower its key interest rate. This has, in turned, served to weaken the dollar.
The Fed is an independent federal agency, over which the president, for example, should not have any influence. Despite this, Trump has repeatedly tried to interfere in its operations. Trump’s objective is to cut interest rates, as lower rates should support the US economy and weaken the dollar. A weaker dollar, in turn, would benefit US companies’ exports and give them the upper hand compared to other countries.
Powell has nevertheless upheld the Fed’s independence and maintained the key interest rate. The newly announced tariffs may increase inflationary pressure, which will make the central bank’s main task – maintaining price stability – more difficult. If inflationary pressure grows, the Fed will also have fewer opportunities to cut the key interest rate. The markets are still pricing in around four rate cuts for the Fed for this year, as the markets expect US economic growth to weaken.
Right now, Trump’s administration is looking for ways to push Powell out of his job before his term ends in May 2026. By then at the latest, Trump will be able to appoint a person of his choice, who would presumably push more strongly for a Trump-approved monetary policy – a lower key interest rate and a weaker dollar.
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