In the latest Yahoo Finance Chartbook, Yale Budget Lab director of economics Ernie Tedeschi noted there is “considerable uncertainty about President Trump’s Trade agenda for 2025.”
Tedeschi’s chart shows that when taken literally, Trump’s campaign proposals could increase the average effective tariff rate by anywhere from 7 to 27 percentage points. The high end of the estimate would bring the average effective tariff rate to a level not seen since 1900.
“That would represent the most dramatic shift in both trade and tax policy in the US in generations,” Tedeschi said.
Specifically, markets are focused on what tariffs could mean for inflation and, therefore, the Fed’s interest rate plans. Deutsche Bank chief US economist Matthew Luzzetti told Yahoo Finance that without tariffs, his team would expect core PCE inflation, the Fed’s preferred gauge, to fall to 2.5% by the end of 2025. This would be in line with the Fed’s target. The metric clocked in at 2.8% on an annual basis in December.
“But if you factor in 25% tariffs on Mexico and Canada, it is very easy to get to 3% plus core PCE inflation forecast this year and acceleration in inflation, not a deceleration,” Luzzetti said.
This leads Luzzetti to believe the chart below is “exactly why the Fed has uncertainty right now and is in a wait-and-see mode.”
“That chart, I think, really epitomizes why [Fed] Chair [Jerome] Powell says the Fed isn’t in a hurry, and they want to see how these policies play out,” Luzzetti said.
And while not the base case, Luzzetti added that a significant reacceleration in inflation above 3% could bring the conversation of Fed rate hikes back to the forefront.
On Wednesday, Federal Reserve Chair Jerome Powell acknowledged the economic outlook for 2025 is likely more uncertain than normal, citing various “significant policy shifts,” including on tariffs.
But when asked what the Fed would need to know about Trump’s tariffs plans before having enough information to decide whether or not to shift monetary policy, Powell said it’s not a linear read.
