Fed likely breathing sigh of relief on tariff pause: fmr. Kansas City Fed President Thomas Hoenig

Key Concepts:

• Reciprocal Tariffs: Taxes imposed on imports and exports between countries.
• Liquidity: The availability of liquid assets to a market or company.
• Securities Yields: The return on investment in securities, such as bonds.
• Debt Refinancing: Replacing existing debt with new debt, often at a lower interest rate or with different terms.
• Reconciliation (Legislation): A legislative process used in the United States Congress to expedite the passage of certain budget-related legislation.
• Inflation Expectations: Beliefs about future inflation rates.
• Federal Reserve (The Fed): The central banking system of the United States.

Markets Roaring Back After Tariff Pause

• President Trump authorized a 90-day pause on reciprocal tariffs, leading to a market rebound.
• The Fed was expecting tariffs to continue, and this pause provides relief due to concerns about market liquidity.
• There were concerns about refinancing U.S. debt, with securities yields moving up, but the pause has eased these concerns.

U.S. Debt and Fiscal Policy

• The United States has significant debt to refinance and finance new debt.
• Legislation around reconciliation, increased spending, and tax cuts will impact the debt.
• The debt issue has been temporarily sidelined due to the focus on tariffs.

Impact on Inflation and Business Confidence

• Even with the tariff pause, uncertainty remains, affecting business confidence and willingness to spend.
• The pause is not reinforcing, meaning the uncertainty remains.
• Existing tariffs on steel and the ongoing trade war with China create inflationary pressures.
• Inflation expectations are already high, and these tariffs will likely exacerbate the issue.

The Fed's Response

• The tariff pause gives the Fed time to assess the longer-term impact and whether to change their outlook.
• The Fed needs to be cautious because inflation remains an issue, with rates around 2.8% to 3%.
• The Fed is paying attention to inflationary issues.

Conclusion

The 90-day pause on reciprocal tariffs has provided temporary relief to markets and the Fed, but significant uncertainties remain. The U.S. still faces challenges related to its national debt, inflationary pressures from existing tariffs and the trade war with China, and the need for the Fed to carefully assess the long-term impact of these factors on monetary policy. The pause does not necessarily make it easier for the Fed to cut rates, as inflation remains a concern.