Tariffs cause flight to safety

Announced to great fanfare at the White House, the Trump tariffs bellyflopped in the markets last week. Stocks across the world flashed red while Treasury prices blinked green, indicating investors sought the safety of government bonds. Yields plummeted as a result.

The threat that the tariffs could lead to higher costs and slower growth has the Federal Reserve in a difficult position. Its dual mandate of maximizing employment in the context of stable prices will be put to the test. Inflation had been on a bumpy course but at least was heading lower; job growth had slowed but was still solid. Tariffs could certainly degrade both. Faced with increased costs, companies will have to be nimble to navigate away these now rockier shoals.

Economic data released last week seems quite dated. More jobs were added in March than had been expected, but the employment rate ticked up from 4.1% to 4.2%, matching its highest level over the last three and a half years. Both the services and the manufacturing sectors slowed more than expected in March, and their new orders and employment components were weaker than expected.

Topping off the week, Fed Chair Powell said that the economic impact of the tariffs is likely to be significantly larger than expected and may lead to a growing inflation problem. He reiterated that the Fed will wait for greater clarity before considering any adjustments of its policy stance. Next week brings more March inflation and consumer confidence data.