Evan Brown on De-escalation of Tariffs and Fed Rate Policy

Tariff De-escalation and Market Impact

• 💡 Evan Brown suggests we are entering a 'de-escalation mode' regarding tariffs, indicating a potential shift in trade policy.
• 🎯 The Trump administration is perceived as recognizing that tariffs are unsustainable and is becoming more sensitive to the bond market's reaction.
• ⚠️ The administration is conscious of the political implications of rising mortgage rates, seeing the bond market as a key concern.

Economic Goals and Trade-offs

• 📈 A potential strategy discussed is the administration slowing the economy to lower rates and inflation, then backing off tariffs, even if it means a suboptimal GDP number or recession.
• 📉 Before tariffs, bond yields were falling due to organic cooling in the US economy, indicated by job cuts and slowing immigration.
• 📊 Tariffs have complicated this by increasing inflation risk and potentially alienating foreign buyers of U.S. Treasury bonds.

Federal Reserve and Inflation Fight

• ⚠️ The Fed will likely need to cut rates but must first appear hawkish to manage inflation expectations, especially with inflation potentially annualizing above 3-4% due to tariffs.
• 📉 Rate cuts are expected only when real weakness in the economy becomes apparent, which has not yet been observed.
• ⚖️ The jobs market may ultimately win out over inflation concerns, with the Fed potentially cutting rates if economic growth weakens, even with elevated inflation.

Economic Outlook and Earnings

• ⚠️ A worst-case scenario involves the Fed cutting rates while the economy appears resilient and inflation spikes, leading to medium-term stagflationary concerns similar to the 1970s.
• 📊 While Q1 earnings were solid, the outlook for future earnings is murky.