Key findings
Everything Is Up
Inflation, Interest Rates, & Economic Growth
Inflation
Inflation outlook is mixed at best. Plenty of experts already are taking exception on both the economic effects of the tariffs and the exaggerated/imagined threat to Federal Reserve independence.
Thomas Simons, chief U.S. economist at Jefferies, said the worries about Fed independence are overblown. He stresses the importance of administration actions in shaping economic conditions. He thinks the anticipated concentration of power among Trump appointees at the Federal Open Market Committee (FOMC) likely won’t change consensus decisions.
More than three-quarters of survey respondents believe consumers are the largest victims of the costs of tariffs. They further estimate that, on average, only 31% of these costs get passed through to consumers. Furthermore, wholesalers and importers are identified as having absorbed 29% of tariff costs, followed by retailers at 23%. This distribution highlights the complex nature of tariffs’ effects on various sectors of the economy.
Richard Bernstein, CEO of Richard Bernstein Advisors, explains what tariffs really mean in the big picture. He observes that “economists, myself included, over-estimated the near-term inflationary impact of tariffs because we didn’t anticipate companies eating the tariffs and squeezing margins.” This final statement is more than just semantics and is a result of recalibrating expectations as companies get used to the new economic order.
In fact, most economists pretty much universally expect that Trump’s policies will create higher inflation. A worrying 68% of respondents believe that the actions taken will put upward pressure on prices. Farther out, most everyone is expecting unemployment to start increasing. In fact, 57% think that this result will directly be a result of the president’s actions.
As with inflation, opinions about the impact of higher interest rates are divided. About 39% of military respondents believe Trump’s actions will result in lower interest rates. A roughly similar percentage expects his actions to lead to increased rates. This unusual divergence is a sign of great uncertainty about the path of monetary policy going forward as the political situation continues to unfold.
The shadow of a possible recession still hangs heavy in the eyes of economists. Right now, 55% are predicting at least a moderate recession—typical recession lasting about ten months—if it materializes. This is up considerably from July’s survey when just 38% thought so. Analysts have pointed to tariffs and overall economic uncertainty as major boogeymen to growth. John Ryding, chief economic advisor at Brean Capital, states, “Tariffs and uncertainty remain the major threat to growth. A reduction in Fed independence could add to these risks.”
Second, a surprising number of these survey respondents predict lower economic growth as a result of presidential policies. Roughly 54% believe that these measures will slow the state’s economic growth. Analysts are concerned that aggressive moves to reduce Fed independence might pressure the central bank into adopting policies that favor short-term growth over long-term stability.
Hugh Johnson, chairman and chief economist at Hugh Johnson Economics, remarks on the administration’s strategy regarding the Fed: “The Trump administration is likely to continue its attempts to reduce the independence of the Fed with an objective being to pressure the Fed to reduce short-term interest rates meaningfully and boost economic growth even at the expense of placing some upward pressure on inflation.”
Drew T. Matus, chief market strategist at MetLife Investment Management, adds further context by noting that “the labor market is weak, consumers have not yet noticed tariff-driven inflation, and inflation pressures are likely to really be transitory.” His words reflect a bit of the stiff arm approach economists should take towards today’s economic signals.
In response to these findings, Joel Naroff of Naroff Economics suggests a more strategic perspective on Trump’s appointments: “By appointing loyalists to the Fed, Trump expects to gain effective control over policy while maintaining plausible deniability if, or more likely when, the policies go awry.” This commentary aims to illuminate the political forces driving economic policy.
Those survey results create a complicated picture of today’s economic landscape. As policymakers navigate these challenges, economists remain vigilant about the multifaceted effects of tariffs, potential recessionary trends, and shifts in monetary policy.