Economist Diane Swonk on Trump Tariffs, Inflation, and Recession Risks

Impact of New Tariffs

• 📈 The U.S. has imposed sweeping tariffs on nearly 100 countries, with import duties soaring to their highest levels since 1933, averaging an effective rate of 18 percent.
• ⚠️ Tariffs are expected to cause a one-time increase in price levels, but the current doubling of tariffs will likely add to inflation and squeeze profit margins, potentially leading to cost-cutting or layoffs.
• 📉 The significant size of these tariffs means they cannot be fully absorbed by firms or completely passed on to consumers, creating a potential for stagflation.

Inflation and Economic Slowdown

• 💡 Inflation is projected to pick up to about 3.5 percent by year-end and remain elevated due to the sequential nature of tariffs and inflation already running above the Fed's target for over four years.
• ⚠️ The combination of rising inflation and a labor market showing signs of stagnation increases the risk of a persistent bout of inflation.
• 📉 There is a 40 percent chance of a recession, with indicators like the increasing share of long-term unemployed suggesting we may be inching closer.

Federal Reserve's Dilemma

• 📊 The Federal Reserve faces a complex situation with stagnating job growth and rising inflation, making decisions about interest rates challenging.
• ⚠️ The Fed needs to maintain a narrow margin of error in the labor market; job growth of only 50,000 to 80,000 per month is needed to keep unemployment stable.
• 📉 The Fed is expected to cut rates twice by the end of the year, in October and December, as inflation numbers are anticipated to worsen faster than employment figures initially.

Stephen Miran's Fed Nomination

• 🏛️ President Trump nominated Stephen Miran for a short-term, vacant seat on the Fed's Board of Governors, serving through January.
• ❓ This temporary appointment is seen as less significant for market perceptions, with the focus shifting to who will be chosen as a permanent replacement for Chairman Powell.
• 🗣️ Miran is expected to dissent even as the Fed cuts rates, aligning with the president's desire for more aggressive rate cuts.