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If there is shock coming to markets, it could arrive this summer. And it could be in the form of a rate hike from the Federal Reserve.
Apollo Global Management chief economist Torsten Slok says the US economy is already running at a healthy 3% Gross Domestic Product (GDP) growth pace, supported by high stock prices, investments in AI data centers by the likes of Microsoft (MSFT) and Amazon (AMZN), and strong defense spending. Layering on Trump tariffs would add fuel to the economic fire and drive up inflation, warns the veteran economist.
“So if with that backdrop we have policies that are now lifting inflation modestly from an already too high level, then my view would certainly be that then maybe we are not done with the Fed hiking rates. There is a risk that we could still have a rate hike later this year,” Slok told me on Yahoo Finance’s Opening Bid podcast (video above; listen in below).
Slok believes that should inflation accelerate as tariffs take hold, the first rate hike from Fed could come at its mid-June meeting. More may follow, Slok says, which could surprise a market that has settled into the view of the Fed standing pat on rates this year — if not lowering them further.
“If we have a significant increase in inflation because of a strong economy and potentially some policies that give a modest lift to inflation, then you could have several hikes later this year,” Slok added.
The seeds for a renewed bout of inflation are being planted.
On Monday, president Trump signed two executive orders imposing new 25% tariffs on steel and aluminum.
Last Tuesday, the president imposed a 10% tariff on all Chinese imports on top of existing tariffs on the country. China retaliated, placing tariffs on select chips and metals. It also began investigating Google (GOOG) and blacklisted US apparel brands Calvin Klein and Tommy Hilfiger, operated by PVH Corp. (PVH).
Trump recently agreed to pause 25% tariffs on Canada and Mexico for 30 days.
Estimates on the impact of tariffs on inflation vary, but economists agree there will some consequences.
A new report from Deutsche Bank economists project the steel and aluminum tariffs alone could boost the core personal expenditures price index (PCE) — a key read on inflation — by 0.4%.
Should the tariffs on Mexico and Canada go through, inflation could rise more than 3.5%, Deutsche Bank said. On this front, Goldman Sachs economists estimated “long-term” 25% tariffs on Canada and Mexico imports could lift the PCE by 0.7% and hurt GDP by 0.4%.
