Trump’s tariff threat set to derail rate cuts, Deutsche Bank says

According to Deutsche Bank AG, if the Trump administration imposes new trade restrictions, it could have a negative impact on the US economy. This could lead to an increase in inflation and prevent the Federal Reserve from cutting interest rates until next year.

Deutsche Bank US economists, led by Matthew Luzzetti, stated in a note to clients that such a shift in trade policies could counteract the positive supply dynamics that are currently supporting strong economic growth and disinflation. With inflation already above the Fed’s target and concerns about potential inflation risks, trade policies could provide another reason for the Fed to hold off on interest rate cuts until 2025.

As President Trump campaigns for a second term against President Joe Biden, he has proposed several protectionist trade measures. According to Deutsche Bank, some of the key trade-related policy proposals from the Trump campaign include:

  • Implementing a universal 10% minimum baseline tariff on all imported goods and services.
  • Removing China’s most favored nation trading status and imposing higher tariffs on imports from China.
  • Imposing reciprocal tariffs that match the rates on US exports.
  • Considering other tariffs, such as reinstating tariffs on steel or introducing new ones on imports, like automobiles, from Europe.

In the meantime, swaps traders are now pricing in the possibility of a full interest rate cut by December, as inflation readings gradually decrease. However, many market watchers believe that a rate cut before the election, possibly in September, is unlikely. Deutsche Bank predicts a base case scenario of one 25 basis point rate reduction this year.
According to the bank’s economists, if Trump’s proposed universal 10% baseline tariff is implemented, it would result in an increase of 120 basis points in headline personal consumption expenditure (PCE) and a 140 basis point rise in core PCE prices. They also noted that if the average tariff rate on Chinese imports were to increase from 12% to 50%, it would raise both headline and core PCE prices by approximately 20 to 30 basis points.

The economists further highlighted that while a universal baseline tariff may boost revenues, it could also have a negative impact on economic growth. Additionally, such tariff policies would contribute to further inflationary pressures.