Economy Could Falter if Fed Turns Hawkish on Trade War Inflation, Analyst Says

Photo Credit: Andy Wong/AP/Shutterstock
May 10, 2019
Updated 11d ago

By Chloe Aiello

Amid uncertainty around the escalating trade war with China, investors have been remarkably patient. But that could all change if the Federal Reserve gets aggressive in combating trade war-driven inflation, Albion Financial Chief Investment Officer Jason Ware told Cheddar on Friday.

"If we are talking about inflation potentially picking up because of trade problems, we just saw the Fed pivot from being fairly hawkish to dovish a few months ago. Markets celebrated that. If they all of a sudden now have to pivot back because we see prices going up on trade war-induced inflation, then we could have some challenges ahead," Ware said.

The Trump Administration announced tariff hikes from 10 percent to 25 percent on $200 billion in Chinese goods on Friday morning after U.S. and Chinese negotiators failed to strike a deal on trade that seemed well within reach just a week ago. U.S. trade Representative Robert Lighthizer and Secretary of Treasury Steve Mnuchin told reporters talks fell apart after China reneged on multiple concessions.

"There were some agreements made with the administration in China on maybe leveling the playing field as far as how China funds some of their industries through the state-owned banks," Ware explained. "They were getting some ground there, and I think China was from what we can tell, trying to walk some of those back last minute."

President Trump took to Twitter to defend his decision to go through with the latest round of tariffs, as well as to take a dig at his political opponents.

"Tariffs will make our Country MUCH STRONGER, not weaker. Just sit back and watch! In the meantime, China should not renegotiate deals with the U.S. at the last minute," he wrote.

But Ware said that, ultimately, U.S. consumers will bear the brunt of tariffs.

"Consumers will pay more. The idea that China is paying the U.S. treasury directly is not accurate. The reality is that American importers pay these taxes, these tariffs, and that gets pushed through the supply chain to everybody that's making purchases," Ware said.

Ware said trade war-driven inflation could prompt a revised policy position from the Fed, which adopted a more dovish approach to rate hikes following volatility at the close of 2018. The Fed had in December anticipated as many as two interest rate hikes in 2019, but gradually shifted its outlook ー and some investors have even come to expect rate cuts, The New York Times reported. If tariffs prompt inflation, many fear the Fed will adjust its policy again.

"We are going to see higher inflation if this continues and is not resolved ー I don't know when, but at some point down the road. And of course that puts the Fed into a tricky position," Ware said.

The tech-heavy Cheddar 50 Index, which measures the performance of Cheddar's 50 top companies ー from Apple ($AAPL) to GM ($GM) ー closed the day down just slightly. The index was dragged by Snap ($SNAP) and SurveyMonkey ($SVMK), which were both down more than 4 percent, whereas Canadian cannabis companies Cronos Group ($CRON) and Tilray ($TLRY) were top performers of the day.

Meanwhile, major indexes recovered from earlier losses to finish up on the day. The Dow Industrial Index recovered from about a 350-point drop to close the day up more than 100 points. The S&P 500 clung to gains, closing up 0.4 percent; and the Nasdaq also finished up slightly.

"You recall in 2018, when we got trade news, if it was bad news, we saw these big dips in the market. We saw tons of uncertainty and volatility," Ware said. "The economy is actually stronger now than it was when we started. I think people are kind of scratching their heads and wondering: does it really matter, and if it does, to what extent?"

"I think the market is starting to get exhausted by this and to some degree is taking it in more in stride than it was six to 12 months ago," he added.

Trade talks wrapped up for the day around 12 p.m. on Friday, but some are holding onto hope there is still time to strike an agreement before tariffs take effect, CNBC reported.