President Donald Trump’s decision to impose 25% tariffs on Canada and Mexico and an additional 10% tariff on China from this coming Tuesday, (with the only partial exemption for Canadian energy imports that will be subject to a lower 10% rate,) is just the first strike in what could become a very destructive global trade war. Imports from the European Union will be hit within the next month or two and a universal tariff is coming in April. Since exports to the US account for around 20% of their GDP, today’s tariffs could plunge both the Canadian and Mexican economies into recession later this year. The resulting surge in US inflation from these tariffs and other futures measures is going to come even faster and be larger than we initially expected. Under those circumstances, the window for the Fed to resume cutting interest rates at any point over the next 12 to 18 months just slammed shut.
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