Goldman Sachs chief economist Jan Hatzius said that the tariff plan proposed by former US President Trump may lead to the Federal Reserve raising interest rates an additional five times.
Hatzius outlined the impact of Trump's proposal to impose a 10% tariff on all imports at the European Central Bank's annual meeting in Sintra, Portugal. He then assumed that all other countries would raise tariffs in retaliation, and the ensuing trade war would raise trade policy uncertainty to levels not seen during Trump's first presidency.
Hatzius said this would increase U.S. inflation by 1.1 percentage points and would only increase European inflation by a modest 0.1 percentage point.
Goldman Sachs predicts the impact of Trump's proposed tariffs
However, the impact on economic activity will reverse. Eurozone GDP will be affected by 1 percentage point, while the U.S. will be affected by only 0.5 percentage point, Hatzius said. "This asymmetry reflects that trade policy uncertainty has a stronger negative impact on the eurozone than on the U.S.," Hatzius said.
He then uses the criteria of the Taylor rule and uses these numbers to derive the monetary policy implications. He points out that in Europe, interest rates will actually fall by 40 basis points due to the drag on economic growth. However, in the United States, interest rates will probably rise by 130 basis points due to the huge inflationary effect.
Trump has widened his lead over Biden in the polls since last Friday's presidential debate. He is ahead by 6 percentage points in the CNN poll.
As Wall Street adjusts for a possible return of Trump to the White House since last week's televised debate, traders in the $27 trillion Treasury market are betting that long-term bond yields will move higher, with the 10-year Treasury yield climbing 15 basis points. It's a bet known as the steepening trade, which has gained momentum since the first presidential debate.
The article is forwarded from: Jinshi Data