Trump's tariff plans could lead to five extra Fed rate hikes, Goldman Sachs chief economist says

By Steve Goldstein

The tariff plan proposed by former President Donald Trump would lead to five extra interest rate hikes from the Federal Reserve, according to Goldman Sachs's chief economist.

Jan Hatzius, at the European Central Bank annual conference in Sintra, Portugal, outlined the impact from Trump's proposal of a 10% tariff on all imports.

He then assumes, all other countries reciprocate, use the tariff revenue for tax cuts, and that the ensuing trade war lifts trade policy uncertainty to levels at the peak of Trump's first presidency.

Taken together, Hatzius says that would lift U.S. inflation by 1.1 percentage points. European inflation would only rise a tepid 0.1 points.

The impact on activity, however, would be reversed. Hatzius says euro-area gross domestic product would be hurt by 1%, while the U.S. would only be hit by a 0.5 percentage point. "This asymmetry reflects a more negative impact from trade policy uncertainty on investment in the euro area than in the U.S.," says Hatzius.

He then uses those numbers to come up with monetary policy impact, using a standard called the Taylor Rule. In Europe, interest rates would actually come down by 40 basis points because of the economic growth drag. In the U.S., however, rates would rise by 130 basis points, because of the large inflation effect.

The Fed usually but doesn't always move rates in quarter-percentage-point, or 25 basis point, increments.

Trump's lead in polls versus President Joe Biden has grown since Thursday's presidential debate. In a CNN poll, he has a lead of six percentage points. The yield on the 10-year Treasury BX:TMUBMUSD10Y has climbed by 15 basis points since the televised debate last week.

Also read: Biden offers latest debate excuse as Harris pulls level in one betting market

-Steve Goldstein

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07-03-24 0618ET

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