Uncertainty Rules The Day

Officials' Conflicting Statements Worsen Volatility

Daily back-and-forth on US import tariff policy dominated financial news last week and put a cloud of uncertainty over the economic outlook. Some tariffs were canceled, others were postponed, and the status of some levies was left unclear. It became a guessing game for investors trying to understand which of the tariff increases will actually be implemented, compared with the countries / commodities where the threat of a levy is announced only to be withdrawn if the relevant lobby group appeals successfully to President Donald Trump.

The week began with the announcement of 25% levies on imports from Canada and Mexico, two of the three biggest trading partners of the United States. The other large trading partner, China, faces an extra levy of 10% on top of other tariffs that have already been imposed.

While the official Chinese response was restrained, the moves were met with strong responses by Canadian and Mexican leaders. Canada’s Prime Minister Justin Trudeau directly addressed President Trump in a public speech on Tuesday, referring to the tariffs as “a very dumb thing to do.” Mexican President Claudia Sheinbaum promised an announcement on Sunday containing her retaliatory moves.

All these statements at the level of national leaders were accompanied by senior US officials expressing contradictory sentiments in public, adding to market volatility. Commerce Secretary Howard Lutnick suggested in interviews that Trump would reprieve tariffs if Mexico and Canada complied with USMCA, the three-country trade agreement. A postponement of the tariffs did, in fact, take place toward the end of the week.

When President Trump started a phone call with President Sheinbaum on Thursday, it appeared that the 25% tariff would come into effect imminently. By the end of the call, the leaders had declared their mutual respect, Trump called Sheinbaum “a wonderful woman,” and tariffs have been postponed to April 2. What will happen then? The suspense continues!

The massive market swings — in both Treasurys and equities — was a result more of the uncertainty of the next steps than even the actual imposition of tariffs would have caused.

In contrast to Lutnick, Treasury Secretary Scott Bessent defended the tariffs telling his audience at the Economic Club of New York on Thursday that “access to cheap goods is not the essence of the American dream.” He did not expand on what is the American dream! He conceded on CNBC Squawk Box yesterday that the US economy is “starting to roll a little bit” but attributed it to the economy adjusting away from its erstwhile dependence on public spending. No reference to the impact of on-and-off tariffs and how they are affecting businesses’ willingness to spend and hire workers.

Federal Reserve Chairman Jerome Powell did not help matters by downplaying fears about a US economic slowdown even though he acknowledged “elevated levels of uncertainty” stemming from the tariffs and employment cutbacks that the Trump administration has planned. Last week’s SriKonomics outlined some of the reasons for declining US consumer confidence and the resulting decline in consumer spending.

Despite having no insight into what would come next in terms of Trump policy measures, Powell asserted in his speech Friday that “the U.S. economy continues to be in a good place.” This, as job growth in February was slightly below expectation in the data released by the US Bureau of Labor Statistics yesterday, and as the unemployment rate rose from 4% in January to 4.1% last month. While Powell’s cheerleading resulted in equities turning around from a mid-day low, they could not avoid a losing week.

With fiscal and tariff policies causing elevated “uncertainty” — Powell’s word — the Chairman added to the uncertainty by indicating only that he was in no hurry to cut interest rates. Trump had spoken about increasing tariffs even during his presidential campaign. Why had Powell led the Federal Reserve in its one-percentage point reduction in the Federal Funds rate between September and the end of the year, only to declare a pause now? Now, markets will have to play the guessing game of the extent of decline in equities that would bring Powell Put back into play with a big reduction in rates and, possibly, reintroduction of Quantitative Easing. Inflation be damned!

The Chairman has famously declared in the past that he does not worry about fiscal policy when implementing monetary measures. What he needs to read up on is the Tinbergen Rule, attributed to the Nobel Prize winning economist, Jan Tinbergen. The Rule states that policymakers with one policy instrument can hope to attain, at most, one economic objective.

Powell and his Fed colleagues are tying themselves into knots trying to reach both employment and inflation goals with the single monetary policy tool they have. They would be better off letting the Trump administration deal with the employment objective, focusing only on lowering inflation to target.

Once cheerleading equity markets is removed from Powell’s policy kit, investors would have a clearer picture of what would happen next with interest rates.

Dr. Komal Sri-Kumar

President, Sri-Kumar Global Strategies, Inc.

Santa Monica, California

srikumar@srikumarglobal.com

@SriKGlobal

March 8, 2025

Sri-Kumar Global Strategies, Inc. advises multinational investors and sovereign wealth funds on global risk and opportunities. Dr. Sri-Kumar is regularly featured on business TV and Radio media, and is a frequent speaker in global financial centers on major topics that affect markets and investments.

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