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Trump Eyes 10% Tariff Comeback: What It Means for Your Wallet

Daniel Kim Views  

Yonhap News

There are reports that former President Donald Trump is considering implementing a 10% tariff on all imported goods if he wins the November election and returns to the White House. Speculations suggest that if this policy is enacted, the Federal Reserve (Fed) might need to increase the benchmark interest rate five times. The rationale is that increased tariffs would raise import prices, compelling the central bank, which aims for price stability, to adjust interest rates in response.

According to MarketWatch on the 3rd, Jan Hatzius, Chief economist of Goldman Sachs, emphasized at the annual forum hosted by the European Central Bank (ECB) in Portugal that if Trump adds a 10% tariff, as he said, “would increase U.S. inflation by 1.1 percentage points,” and “In the U.S. rates would rise by 130 basis points because of the large inflation effect.”

Typically, the Fed raises or lowers interest rates by 0.25 percentage points at a time. Assuming a 1.3 percentage point rise. They have no choice but to adjust interest rates nearly five times.

Hatzius assumed that other countries would respond with retaliatory tariffs when calculating the impact of U.S. tariff increases. He then thought that “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.”

In this case, the U.S. inflation rate is expected to rise by 1.1 percentage points. The impact is more significant than the 0.1 percentage point increase in European inflation. The effect on economic activity works oppositely, with the Eurozone’s GDP growth rate expected to decrease by 1 percentage point. The U.S. is expected to take a hit of about 0.5 percentage points. The Eurozone will have to lower the benchmark interest rate by 0.4 percentage points to prevent such economic growth slowdown.

Hatzius said, “This asymmetry reflects a more negative impact from trade policy uncertainty on investment in the euro area than in the U.S.” Hatzius applied the Taylor Rule when calculating the appropriate interest rate adjustment range of the central bank in response to changes in inflation or GDP growth rate. The Taylor Rule is a guideline for central banks to adjust interest rates in line with economic growth and inflation rates.

Meanwhile, recent polls show a high possibility of Trump’s re-election. According to the Wall Street Journal (WSJ), Trump and President Joe Biden received 48% and 42% support in a head-to-head match, respectively. This is the answer to the question, Who would you vote for if the election were held today? Asked to 1,500 registered voters from June 29 to July 2. The 6 percentage point gap between the two candidates exceeds the ±2.5% margin of error. In particular, the support rate gap between the two candidates, which was at a 2 percentage point level in February, is analyzed to be the largest since the second half of 2021.

Daniel Kim
content@viewusglobal.com

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