Rob Kaplan on Tariffs, Fed Policy, and Economic Growth Outlook

Impact of Tariffs on Businesses

• 📈 Clients are still reacting to recent tariff policy changes, with the administration likely to find other ways to implement them.
• ⚠️ Tariffs are expected to settle in the low to mid-teens, posing challenges for companies, especially small businesses lacking leverage.
• 🛠️ Larger companies are reviewing logistics and supply chains, with adjustments potentially taking six months to a year.
• 💰 Businesses may pressure suppliers, absorb some margin loss, and increase prices, while also looking for internal cost savings.

Economic Growth and Recession Risk

• 📉 The probability of a recession is estimated at 35%, but sluggish growth is more likely than a severe downturn.
• 📊 Fiscal policy may be more expansionary or neutral due to less deficit reduction and a potentially more expansive tax package.
• 🧑‍💼 Decelerating labor force growth, influenced by immigration policy, is tightening the labor market and making a sharp unemployment spike less likely.
• 🌍 Tariffs are seen as a factor that will slow growth and raise prices, contributing to the sluggish growth outlook for the remainder of the year.

Federal Reserve Monetary Policy

• ⏳ The advice for the Fed is to be patient and let structural changes unfold before making policy decisions.
• ⚠️ An increase in unemployment would be the primary factor forcing the Fed to cut rates more aggressively.
• 🗓️ The Fed is expected to take a meeting-by-meeting approach, with a better sense of tariff impacts emerging through the summer and fall.
• 📉 If still at the Fed, Kaplan would project one to two rate cuts, likely one, which is less than the market expects.

Bond Market and Long-Term Rates

• 🏦 The Fed has limited influence over long-term rates like the 10-year Treasury yield.
• 📊 The deficit is a key concern, with deficits near 7% at the start of the year and potential lack of material reduction.
• 📈 This deficit situation may be contributing to an inching up of the 10-year yield and term premium, making duration buying more difficult.