UBS warns: expanding tariffs in the US may make it harder for the Federal Reserve to lower inflation.

UBS Group's global head of economic and strategic research, Arend Kapteyn, said in a TV interview with Stephen Engel on Tuesday that Donald Trump's decision to gradually increase tariffs after taking office will be a "problem" for the Federal Reserve as it deals with the final mile of inflation. Kapteyn explained, "We view tariffs as a one-time level shift in prices that will disappear after a year, and as long as tariffs do not have a large impact, there will be no spillover effects or second-round effects resembling inflation." However, he warned, "But if rolling tariffs are implemented, it's a bit like reliving the experience we had with pandemics and the Ukraine shock, where you face one supply shock after another, and you start leading to higher peaks of inflation, so I think knowing how to react as a central bank will become more difficult." Earlier, Bloomberg reported, citing unnamed officials, that members of Trump's new economic team are discussing gradually raising tariffs on a monthly basis to increase negotiating leverage and help avoid soaring inflation. Kapteyn said he doesn't believe that financial markets have already priced in the risk of the United States increasing tariffs. He stressed, "We do think it will lead to inflation," and added, "Then it becomes a question of tariffs, who can be exempt from tariffs, how much can be exempt, and from which tariffs." Kapteyn further noted, "If broad-based tariffs are implemented, the inflationary pressure will be greater than initially exempting goods from other choices." Investors are eagerly awaiting the US inflation data to be released on Wednesday, which may show that basic prices will only slightly cool by the end of 2024. This could support the Fed's gradual rate cut approach after last year's three rate cuts. The money market expects only one rate cut in 2025. Meanwhile, US inflation data increasingly shows that the process of stabilization in prices has largely stalled, despite no signs of significant difficulties in the labor market and demand. Trump's return to the White House has increased the uncertainty about the global economic growth and inflation outlook. Jan Hatzius, chief economist at Goldman Sachs, said in a TV interview with reporters that Goldman Sachs forecasts that the US core inflation rate will be around 2%, very close to the Fed's target. He said on Tuesday, "In this environment, I still think there could be several rate cuts," and added, "But clearly the FOMC is not in a hurry, which is why we believe the first rate cut may not come until later in the second quarter, possibly at the meeting in June." However, he warned that if the inflation rate continues to rise and stays around 3% throughout the year, the Fed may not cut rates at all. Hatzius also stated that US tariffs are unlikely to have a "major impact" on inflation and growth.