The Tariff Tango: Trump’s Latest Move May Actually Save the Day

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What to Know:

  • Despite the looming specter of stagflation, market indicators are hinting that Trump’s tariffs could eventually pull inflation down, possibly giving the Federal Reserve room to cut rates. Oh, joy.
  • Historical analysis (which we all love to pretend to understand) suggests tariffs tend to be disinflationary in advanced economies. Essentially, they might actually lower prices by triggering reduced consumer spending. Who knew?

The delightful US-China trade war—oh, how it stirs the hearts of financial analysts everywhere—might just be the secret weapon to quell inflation. Yes, it’s true. Even key sections of the financial market are suggesting that Trump’s tariffs could spark a reduction in inflation, offering a bullish outlook for risky assets, including, brace yourselves, Bitcoin. How thrilling!

Ah, the good ol’ days of January 20, when President Trump took office and said, “Tariff and tax foreign countries to enrich our citizens.” And so, with the elegance of a bull in a china shop, he shot the first tariff dart at China, Canada, and Mexico on February 1. Since then, tariffs have soared like an overcooked soufflé, leading to a retaliatory game of ‘who can annoy the other more.’

Of course, tariffs naturally bump up the cost of imported goods. The lovely result? Higher prices for all of us. Perfect. But wait—there’s a twist in this economic drama! As tariffs settle in, markets are now fretting about the possibility of a tariff-induced inflation surge. How charming. This concern was only amplified by the Fed’s rather dramatic stagflation projections last month. Stagflation—ah, the sweet cocktail of low growth, high inflation, and joblessness—truly the worst nightmare for risky assets.

Meanwhile, Bitcoin, our favorite volatile digital asset, has fallen nearly 20% since February. Who said we don’t enjoy a good plunge, right? Wall Street is likewise jittery, and investors have simultaneously dumped stocks, bonds, and, to top it off, the U.S. dollar. It’s like a financial fashion show, with ‘panic’ being the new black.

Breakevens Suggest Disinflation (Yes, Really)

But wait, there’s hope! It turns out that market-based measures of inflation—such as the ever-charming breakevens—are suggesting tariffs could, in the long run, actually be disinflationary. Yes, you read that correctly. The Fed’s gloomy stagflation forecasts might just be, how shall we put it… a tad premature. Could it be that the Fed has misunderstood this entire debacle? We think so.

For the uninitiated, breakeven inflation is the difference between Treasury bond yields and Treasury Inflation-Protected Securities (TIPS). In February, the five-year breakeven rate peaked at a dramatic 2.6% before falling to a much more relaxed 2.32%, according to data from the Federal Reserve Bank of St. Louis. The 10-year breakeven has similarly dipped from 2.5% to 2.19%. How delightful! Meanwhile, Cleveland’s two-year inflation expectations have stubbornly hovered around 2.6%. Consistency is key.

A One-Time Adjustment, or a Long-Term Fiasco?

According to market sages, the impact of tariffs is just a one-time cost adjustment. Nothing to worry about. (We’ll see.) The long-term consequences tend to be disinflationary, thanks to consumers reducing spending when prices rise without any corresponding income boost. Gasp! This eventually leads to a build-up in inventory, and eventually, prices fall. Truly, this is the stuff of economic poetry.

“Since the days of Smoot-Hawley, tariffs have never been inflationary. They’re deflationary and, in some mysterious way, stimulating. Hallelujah!” says Jim Paulsen, an alleged Wall Street veteran with a flair for the dramatic. On X (which we all love), he added, “The Calvary is coming!” Perhaps he meant cavalry, but who’s counting?

Oh, and let’s not forget the charming words of economist Ravi Batra, who in 2001 wrote, “Tariffs in the US were never associated with rising prices. High tariffs were always followed by a sharp drop in the cost of living. Shocking, really.” That must have been the good old days.

In conclusion, the recent financial turbulence is likely a result of growth fears, not inflation. The bull might just reappear soon, fueled by the hope of a more dovish Fed. Stay tuned, darlings—this ride isn’t over yet. 🎢

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2025-04-11 15:36