From the Fed: Minutes of the Federal Open Market Committee, March 18–19, 2025. Excerpt: With regard to the outlook for inflation, participants judged that inflation was likely to be boosted this year by the effects of higher tariffs, although significant uncertainty surrounded the magnitude and persistence of such effects. Several participants noted that the announced or planned tariff increases were larger and broader than many of their business contacts had expected. Several participants also noted that their contacts were already reporting increases in costs, possibly in anticipation of rising tariffs, or that their contacts had indicated willingness to pass on to consumers higher input costs that would arise from potential tariff increases. A couple of participants highlighted factors that might limit the inflationary effects of tariffs, noting that many households had depleted the excess savings they had accumulated during the pandemic and were less likely to accept additional price increases, or that stricter immigration policies might reduce demand for rental and affordable housing and alleviate upward pressures on housing inflation. A couple of participants noted that the continued balance in the labor market suggested that labor market conditions were unlikely to be a source of inflationary pressure. A couple of participants noted that, in the period ahead, it could be especially difficult to distinguish between relatively persistent changes in inflation and more temporary changes that might be associated with the introduction of tariffs. Participants commented on a range of factors that could influence the persistence of tariff effects, including the extent to which tariffs are imposed on intermediate goods and thus affect input costs at various stages of production, the extent to which complex supply chains need to be restructured, the actions of trading partners in responding with retaliatory increases in tariffs, and the stability of longer-term inflation expectations. emphasis added

These headwinds will persist for the next decade or two. The stock market is rallying hard after a brutal sell-off--not an uncommon occurrence. As we savor our winnings in the ship's first-class casino, it's not a bad idea to step out onto the deck and gauge the weather. There are headwinds. Not zephyrs, not gusts, just steady, strong headwinds. 1. Presidents Trump and Xi view each other an as existential challenge to the future prosperity of the nation they lead. Neither can afford to lose face by caving in, and each has a global strategy with no middle ground. 2. Global trade / capital flows are all over the map. Uncertainty is the word of the moment, but perhaps the more prescient description is unpredictability: if enterprises have no visibility on the future costs of trade, commodities, labor and capital, they have little choice but to avoid big bets until visibility is restored. 3. The American consumer is tapped out. Credit card charge-offs are rising, auto loan defaults are rising, air travel is faltering--there are many sources of evidence that consumers--especially the top 20% households whose spending has propped up the economy--have reached financial and perhaps psychological limits. 4. The Reverse Wealth Effect is kicking in as stocks and other assets roll over into volatility and potential trend changes into declines rather than advances. The top 10% who own the majority of income-producing assets and risk assets are seeing $10 trillion of losses followed by recoveries of $5 trillion. Swings of such magnitude do not support confidence in the stability of current valuations or offer visibility on the odds of future capital gains. Just as enterprises must respond to poor visibility by reducing risk, households respond to increasing volatility and unpredictability by reducing borrowing and spending. Stable gains in asset valuations fuel the Wealth Effect, encouraging consumers to borrow and spend more because their wealth has increased. The Reverse Wealth Effect triggered by losses, volatility and low visibility encourages reducing risk, borrowing and spending. 5. There will be no "save" by the Federal Reserve or massive new Federal fiscal largesse. Tariffs and reshoring manufacturing are inflationary, so the Fed no longer has the freedom to create a few trillion dollars out of thin air to juice risk assets. The federal government's borrowing-and-spending spree threatens the integrity of the nation's currency and economy, so the the unlimited checkbook has been put in the drawer. 6. The two decades of deflation generated by China has ended. Central banks could play in the Zero-Interest Rate Policy sandbox because inflationary forces were all offset by the sustained deflationary forces of China's export machine and credit expansion. Now every economy, including China's, faces inflationary tides from a number of sources. 7. The sums required to rebuild America's industrial base will pinch speculative borrowing and consumer spending. Now that both the Fed and the federal government are restrained from borrowing and blowing additional trillions, private capital will have to be enticed into long-term investments in Treasury bonds and reshoring. The ways to incentivize long-term investing rather than consumption and speculation are recession and deflating asset bubbles. Both re-set expectations, risk appetites and incentives. Everyone with direct experience of manufacturing and supply chain networks is telling us that reshoring will be a costly, long-term project, requiring the rebuilding of the entire ecosystem that's been lost to hyper-globalization's offshoring and hyper-financialization's predation. Note that all credit-driven asset bubbles pop. Yes, the market is rigged, but that doesn't mean it always goes up or it's easy to catch the declines. The dot-com bubble lost 80% of its peak valuation despite assurances that was "impossible." 8. Demographics are not supportive of risk-asset expansion. Courtesy of @Econimica, consider this chart of the year-over-year change in high and high-middle-income populations globally. The change is now negative--fewer folks are entering these categories. In response, global debt has soared, in effect offsetting the decline of consumer demographics with borrowed money. As the global Boomer population retires and needs at-home or institutional care, they will sell their assets to fund these soaring expenses: stocks, bonds, real estate--all will go on the auction block to raise cash. The older cohort of investors is also more risk averse, as they know they don't have a decade or two to recover from a catastrophic decline in their assets' valuations. None of these dynamics can be reversed. These headwinds will persist for the next decade or two. New podcast: The Coming Global Recession will be Longer and Deeper than Most Analysts Anticipate (42 min) My recent books: Disclosure: As an Amazon Associate I earn from qualifying purchases originated via links to Amazon products on this site. 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Just minutes after Goldman Sachs put out a note forecasting a recession, Mr. Trump lowered all tariffs to 10% (except China). Moving to a Recession Baseline We now expect the US’s effective tariff rate to rise by at least 20pp and are forecasting a recession with a 12-month probability of 65%. We think the White House is unlikely to quickly reverse most of the new tariffs, but our probability of recession would decline if it does. emphasis added And just minutes later from CNBC: Trump temporarily drops tariffs to 10% for most countries, hits China harder with 125% President Donald Trump on Wednesday dropped tariffs under his new trade plan to 10% on imports from most countries, as he announced a 90-day pause for stiffer, so-called reciprocal tariffs that took effect this week. It is impossible to forecast with rapidly changing policy.

Plus! Elasticity; Tail Risk; What to Buy; How the Decision Got Made; US Export Pacing

Here are a few measures of inflation: Click on graph for larger image. Services were up 3.7% YoY as of March 2025, down from 4.1% YoY in February. The second graph shows that goods prices started to increase year-over-year (YoY) in 2020 and accelerated in 2021 due to both strong demand and supply chain disruptions. Durables were at -1.0% YoY as of March 2025, up from -1.2% YoY in February. Commodities less food and energy commodities were at 0.0% YoY in March, unchanged from 0.0% YoY in February. Here is a graph of the year-over-year change in shelter from the CPI report (through March) and housing from the PCE report (through February) Shelter was up 4.0% year-over-year in March, down from 4.2% in February. Housing (PCE) was up 4.3% YoY in February, down from 4.5% in January. This is still catching up with private new lease data. Core CPI ex-shelter was up 1.8% YoY in March.