When it comes to American economic policy, the word of the year may well end up being ‘tariff’. So far President Trump’s programme of on-again, off-again tariffs and threatened protectionist measures have dominated news coverage and driven moves in asset markets. But if ‘tariff’ has a contender it will likely be ‘uncertainty’.
Levels of policy uncertainty, especially around tariffs, are currently extremely high. The interaction of new frictions on trade and taxes on imports together with low degrees of visibility on when such measures will be introduced, how they will be, which exemptions will be granted and how long they will be in place is likely to lead to a messy outcome.
Those trying to work out, say, the impact of a 25% tariff on Mexican imports need some sort of forecast of which goods will be covered and which will be granted exemptions and clear idea as to how long the tariffs will be in place. In the absence of such guidance, all forecasts have become fuzzier. That not only complicates the task of any firm weighing up hiring and investment decisions but also makes the Federal Reserve’s job that much harder.
Both tariffs and uncertainty feature prominently. As previously noted by On Global Markets, the evidence suggests that a high level of policy uncertainty in and of itself is a negative for economic growth. In the face of uncertainty, firms tend to delay or even cancel planned investments. The respondents were asked what impact they expected high levels of policy uncertainty to have on annualized GDP growth by Q4 2025. Just 2% thought the impact would be small. 13% expected a reduction of more than one percentage point. The majority were split somewhere in the middle with 44% expecting a shortfall, relative to the base case, of up to 0.5% and 42% plumbing for 0.5-1%. Keeping in mind that this is the impact of higher uncertainty, rather than the underlying policies themselves, and these are meaningful numbers.
On the tariffs themselves, the respondents expected a rise in the price level to result. Asked about the likely impact of 25% tariffs on Mexico and Canada from April 2nd, together with a 20% tariff on China, the median response was that CPI 0.8% higher after twelve months. That said, there was a large range around that median with the 10th percentile point estimate being a 0.4% increase in CPI after 12 months and the 90th percentile point estimate being 2.0%.
On the bigger picture, the panel was reasonably confident that the net impact of the new administration’s policies would be a weaker growth outlook. 60% of respondents believed that if enacted President Trump’s policies would have “some negative impact” on growth in 2025 and 38% believed they would have “a large negative impact”.
Of course, the whole policy package may not be enacted; hence the higher-than-usual uncertainty. The panel were also asked for their best estimate of when the next US recession would begin. 11% of respondents believed such a recession would begin by the second quarter of this year (i.e. it may already be happening) whilst another 24% believe such a recession is likely to begin in the second half of this year. 26% pencilled in the first half of 2026 whilst the remaining 39% went for Q3 2026 onwards, an option which camouflages a much wider range of opinion. Perhaps the best way to think of these results is that around one-third of the panellists expect a recession to begin this calendar year and more than half within the coming 15 or so months. In other words, expert economic opinion is taking recession risks extremely seriously.
Taken together, the poll shows that, relative to the last set of questions back in December, the panellists have revised up their view of inflation and marked down sharply their view of growth. The median forecast for GDP growth in 2025 now stands at 1.6% against 2.3% in the previous survey. The US economy grew by 2.8% in 2024, so something closer to 1.6% would be a notable slackening of pace.
For monetary policymakers a combination of weakening growth together with more stubborn price pressures is just about the most troublesome scenario to handle.
Asked where they expected Fed Funds (currently 4.25-4.5% and expected to fall to 3.6% by the end of the year by financial markets) to be at the end of 2025, 58% went for 3.5%-4%, broadly in line with market participants. That said, more than a quarter expected rates to be higher and just 15% expected the Fed to cut more than the markets anticipate. The balance of risks seems to imply a greater likelihood of tighter than expected monetary policy than easier than expected policy.
It is only March. There is still a long time in which the words ‘tariff’ and ‘uncertainty’ can contend to be the economic policy word of the year. The problem of course is that neither is especially helpful for growth.
