Eric Rosengren on Global Economic Order, Tariffs, and Fed Policy

Reimagining the Global Economic Order

• 🌍 The global economic order is undergoing a significant reimagining, with trade issues impacting confidence in other sectors.
• 🇺🇸 The US, traditionally a safe haven due to its reliable trade, strong legal structure, and stable policies, is seeing these assumptions undermined.
• 📉 This shift, coupled with globalization in reverse, is causing economic relationships to behave differently, as evidenced by rapid increases in Treasury yields.

Uncertainty in US Tariff Policy

• ❓ There is a lack of clarity regarding the long-term goals of US tariff policies, with inconsistent messaging on whether they are intended to be permanent tax increases, incentives for domestic manufacturing, or temporary negotiation tools.
• 📈 This inconsistency creates a highly volatile environment as the end goal remains undefined.
• ⚠️ Tariffs are described as a supply shock, not just a price effect, leading to increased inventories and efforts to find alternative goods, similar to pandemic-related disruptions.

Federal Reserve's Stance

• ⏸️ The Federal Reserve is adopting a wait-and-see approach, remaining on the sidelines until policy clarity emerges.
• 🏦 If trade issues are reversed quickly or are a problem for fiscal policy authorities, there is no immediate reason for the Fed to react.
• 📊 The Fed faces challenges in discerning underlying inflation rates due to supply shortages and price movements, making it difficult to assess consumer reactions to volatility.

Potential for Grand Bargains

• 🤝 The prospect of a comprehensive agreement akin to a new Plaza Accord is unlikely in the short term, requiring much more time to negotiate.
• 🌍 While some countries may be amenable to such agreements on tax and monetary policy, others will likely view them as non-starters.
• ⏳ Dynamic agreements that adapt to changing monetary policies are complex and not straightforward to achieve.

Interest Rate Policy and Supply Shocks

• 📉 Lowering interest rates is a solution for inadequate demand, but it can exacerbate inflation problems if the issue is inadequate supply.
• ⚠️ The Federal Reserve is unlikely to repeat the mistake of lowering rates in response to a supply shock, as seen during the pandemic, which led to increased inflation.
• ⏳ It remains to be seen how long it will take for conditions to stabilize and for the Fed to feel confident in adjusting interest rates.