By Jamie McGeever
ORLANDO, Florida (Reuters) – TRADING DAY
Making sense of the forces driving global markets
By Jamie McGeever, Markets Columnist
New reality about to dawn
U.S. markets on Wednesday were determined to put on a brave face ahead of U.S. President Donald Trump’s announcement of sweeping tariffs that will escalate a global trade war and threaten to upend the entire international trading system.
Stocks rose sharply and Treasuries and the dollar ended notably weaker. Buoyed by hope or expectation that the tariffs wouldn’t be as draconian as feared, U.S. indices closed in the green. The deeper analysis of the tariff fallout – lower growth and higher inflation – will be for tomorrow and beyond.
Fed policymakers and other central bankers are in a bind – do they respond to the weaker growth impulse, or higher inflation? More on that below, but first, a round up of today’s main market moves.
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Today’s Key Market Moves
T-Day arrives, markets rise
So, ‘Tariff Man’ has shown his hand, and now markets nervously await the response from the rest of the world. Most countries will probably play their cards cautiously and carefully, which is what Britain’s finance minister Rachel Reeves and Mexican President Claudia Sheinbaum on Wednesday indicated they will do.
Trump’s tariff salvo adds to the long list of protectionist shots fired since his inauguration in January. The extent of the pain and damage remains to be seen, and earlier on Wednesday European Central Bank President Christine Lagarde said it will be “negative the world over” while Bank of Japan Governor Kazuo Ueda said the hit to global trade could be huge.
Few would argue, although the latest global readout points to a mixed picture in the first quarter as economies grappled with historically high levels of uncertainty and braced for impact – factory activity in India expanded at the fastest pace in eight months, while industrial production in Brazil unexpectedly fell; Mexico’s government on Tuesday lowered its 2025 GDP growth forecast, but to a still rosy 1.5%-2.3%.
The most recent U.S. economic indicators suggest activity and the labor market have held up pretty well ahead of “T-Day” – durable goods orders rose solidly in February and ADP private sector payrolls growth in March beat expectations.
Although the economist consensus is still for GDP expansion in the first quarter and beyond, forecasts are being cut across the board – JP Morgan’s Michael Feroli, for example, slashed his Q1 forecast to 0.0% from 1.0% and his 2025 call to 1.3% from 1.6%.
Still, these and most forecasts are significantly brighter than the Atlanta Fed GDPNow model’s gloomy estimate of 1.4% GDP contraction in the first quarter when adjusted for outsized gold imports.
Thursday is the first day in the new world of Trump’s tariffs, and there’s huge uncertainty and risk for investors to navigate. Let’s see if their optimism from the previous day spills over.
Optimal Fed response to tariffs? Ease policy
Focus on the “stag”. Ride out the “flation”. That may be the Federal Reserve’s optimal plan for handling the new wave of tariffs coming from the Trump administration.
With details of U.S. President Donald Trump’s sweeping tariffs now emerging, all eyes will soon turn to the Fed’s and other central banks’ response to the president’s “liberation day” duties that could leave them in quite a bind.
It’s generally agreed that tariffs are damaging to growth and inflationary, initially at least. So how should central bankers react? Do they cut interest rates to prop up a stagnating economy or raise them to cool fiery price pressures?
According to a Minneapolis Fed working paper published last month, the answer is clearly the former. The authors find that the “optimal” policy response to tariffs is not just to look through the inflationary impact and keep rates steady, but to go even further and ease policy.
“The optimal monetary response is to stimulate the economy, raising aggregate income and boosting demand for imported goods,” wrote Minneapolis Fed economist Javier Bianchi and University of Wisconsin-Madison assistant professor Louphou Coulibaly.
The optimal response, they argue, “is expansionary, letting inflation rise above and beyond the direct effects of tariffs. This result holds regardless of whether tariffs apply to consumption goods or intermediate inputs, whether the shock is temporary or permanent.”
ADVERSE EFFECTS
This all runs counter to the commonly held belief that pouring fuel on an inflationary fire is essentially the most dangerous thing a central banker can do, as it risks “unanchoring” inflation expectations.
But the authors argue that history simply doesn’t show this to be the case. Instead, the data suggests that to mitigate the slump in imports as tariffs bite, the central bank must stimulate economic activity, lift employment and boost income. Policymakers must be prepared to “tolerate some overheating,” the authors contend.
This conclusion reflects another important lesson from economic history: tariffs are pretty bad for growth.
A 2020 study using aggregated data for 151 countries from 1963 through 2014 found that tariffs have “economically- and statistically-significant adverse effects” on growth.
The impact is “persistent” and increases over time, the researchers found. Their baseline model suggests that a 3.6 percentage points increase in tariffs results in a 0.4% decline in economic output five years later.
They actually found that the projected longer-term effect of tariffs on GDP was higher than the estimated medium-term impacts, but they limited their study to a five-year time horizon “in an effort to be conservative.”
PROCEED WITH CAUTION
Right now, Fed officials are also erring on the side of caution. In their revised economic projections released last month, they maintained their forecast for two quarter-point rate cuts this year, although a hawkish underlying shift in the “dot plot” of officials’ individual projections moved the median closer to one cut.
And Fed Chair Jerome Powell has been at pains to be neutral and non-committal on the question of tariffs, insisting that, before acting, he and his colleagues must wait and see what the actual impact is on activity, prices and employment.
Fed Governor Chris Waller, however, was a bit bolder in a speech to the OECD in Paris in January, stating: “If, as I expect, tariffs do not have a significant or persistent effect on inflation, they are unlikely to affect my view of appropriate monetary policy.”
The market is certainly focusing on the “stag” more than the “flation”. U.S. businesses are reporting the highest factory gate prices in years and consumer inflation expectations are the highest in decades, according to some measures, yet bond yields are falling and interest rate futures are pricing in multiple cuts this year and into 2026.
Investors appear to be betting that, if the tariff push comes to the recession shove, the Fed will focus on stimulating growth. History suggests they’re right.
What could move markets tomorrow?
If you have more time to read today, here are a few articles I recommend to help you make sense of what happened in markets today.
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
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(By Jamie McGeever, editing by Nia Williams)
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