10 February 2025
Alex Grassino, Global Chief Economist
The recent announcement of US tariffs on key global trading partners grabbed plenty of headlines but until we get more details, it's hard to assess the global economic implications.
Well, after much anticipation, it’s happened: Over the weekend of 1-2 February, 2025, the Trump administration announced that it would levy 25% trade tariffs on imported goods from Mexico and Canada (10% on Canadian energy products) and an additional 10% tariff on imports from China. The good news for both Canada and Mexico is that they’ve been granted 30-day reprieves from the tariffs after agreeing to make some border-related concessions to the United States.
The question now looms: If we’re back here again in a month, where would we be focused?
These latest developments were a lesson in just how fluid—and anxiety-inducing—the ongoing tariff negotiations can be. But let’s examine the deal as it stands now.
At present, Wall Street’s broad expectation is that the US tariffs in their current form are unlikely to persist and that a much scaled-back version of them will more realistically be the final landing spot. Moreover, if the impacts of said tariffs prove to be transitory, that would be a very different outcome than if we were to see a permanent shock to global economic demand.
We believe tariffs of this magnitude would likely bring US economic growth to sub-trend levels and push domestic inflation modestly higher for a time. The net impact on Canada’s economy could be much more pronounced.
In the medium term, we think the tariffs imply that the US Federal Reserve (Fed) may cut their policy interest rates more than expected:
The argument for the Fed is less clear and more nuanced. That’s partly because the US economy is in a far healthier state than Canada’s these days. Also, the impact of the tariffs on US growth would be less severe than in Canada, potentially allowing the Fed to proceed at a more measured pace and perhaps prioritize keeping inflation down. Alternatively, the Fed could opt to deemphasize inflation, especially if indicators like wage growth and shelter-related inflation slow further.
At this juncture, while we think the Fed is unlikely to cut rates at its next policy meeting or two, we continue to expect the full monetary easing cycle to eventually lead to a terminal federal funds rate of about 3.50%, which we estimate to be slightly above the long-term neutral US policy rate.
We would echo the tried-and-true guidance recently offered by our colleagues on the Capital Markets Strategy Team: Resist the urge to overreact to every breaking newsfeed or social media post—a market mantra that has been borne out time and time again over the years. We get the sense that the initial salvo in this brewing trade war is just that —an initial salvo, and that the actual implications for economies around the world may ultimately look very different from what we see in front of us right now.
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Today’s Federal Open Market Committee (FOMC) decision and press conference went smoothly—a welcome development, in our judgment, after the mixed signals that emerged from the Fed’s July meeting. The rate decision: A 25 basis-point (bps) hike, bringing the federal funds rate from 3.75% to 4.00%.
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