Central banks on both sides of the Atlantic are grappling with how to respond to the looming threat of a trade war and its potential effects on inflation and economic growth. As the Federal Reserve (Fed) and the Bank of England (BoE) prepare to announce their interest rate decisions this week, both are considering the impact of Donald Trump’s tariff threats, which could trigger an economic slowdown, or even a “Trumpcession.”
In the US, the Fed is closely monitoring the risk of tariffs escalating import costs, which would worsen inflationary pressures and prompt a shift in consumer behavior. Consumers, who are the backbone of the US economy, are already reeling from the cost of living crisis, with confidence levels sharply dropping. The Conference Board’s latest index of buying intentions for February recorded its most significant monthly decline in nearly four years.
There is growing concern that President Trump’s disregard for stock market performance in his trade battle with major partners, combined with his indifference to falling output, could lead to a full-blown recession.
Nigel Green, an analyst at investment firm deVere, warns that the combination of rising inflation and an economic slowdown places the Fed in a difficult position. However, he argues that “rate cuts must come sooner rather than later to prevent deeper damage.” He believes the Fed must prioritize avoiding a severe downturn, even at the cost of further inflation.
The Fed’s decision on interest rates is due on Wednesday, and the BoE will follow on Thursday. Like their US counterparts, the BoE policymakers face a dilemma: should they continue cutting rates, or pause and wait to see how the tariff situation unfolds?
Tariffs have become a top concern for the BoE, which had hoped inflation would be under control and that interest rates could fall below 4% in 2025. Today, however, the BoE is more cautious, with the UK rate standing at 4.5%, slightly higher than the Fed’s target rate of 4.25% to 4.5%.
The situation in the UK mirrors that of the US, as inflation remains above the BoE’s 2% target, while unemployment rises in sectors such as manufacturing and construction. Employers are also warning of layoffs.
Robert Wood, chief UK economist at Pantheon Macroeconomics, says the BoE’s monetary policy committee (MPC) faces a tough choice between a slowing employment rate and rising inflation. He suggests that most members of the MPC will prefer to wait for clearer signs before making any rate changes. “It’s reasonable for them to wait until the fog lifts and they can see more clearly what direction the economy is going in,” Wood notes.
Despite official figures showing a surprise 0.1% contraction in the UK economy in January, markets expect the BoE to keep rates on hold this week and only cut rates in May. A quarter-point reduction to 4% is anticipated before the year’s end.
In the US, however, the potential for a sharp downturn in the stock market could lead to a dramatic shift in consumer spending, as retail sales have been heavily driven by wealthier households benefiting from stock market gains. Albert Edwards of Société Générale warns that if the equity market experiences a significant drop, it could disproportionately impact retail sales, deepening the economic slowdown.
Garry White of stockbroker Charles Stanley adds that fears of a “Trumpcession” stemming from aggressive trade policies are driving expectations that the Fed will continue cutting interest rates, despite ongoing inflation. However, uncertainty surrounding the timing of tariffs and their impact on prices has led to expectations that the Fed may delay its rate cut this week.
Related Topics:
O’Dowd Extends Business Rates Relief to Support Local Economy
Business NSW Applauds Procurement Reforms Designed to Support Local SMEs
Australian Business Confidence Slips in February Despite Interest Rate Cut