Trade Wars, Fed Policies, Inflation: Navigating The New Normal For Global Markets

The global economy is currently navigating a complex landscape shaped by tariff decisions, Federal Reserve policies, and market reactions. Amid the brewing trade war, the impact of tariffs on inflation and growth remain a key concern say experts.

While tariffs are expected to have an effect on both inflation and growth, their long-term consequences are difficult to quantify. Stephen Davies, chief executive officer of Javelin Wealth Management, emphasised that the Fed is likely factoring in these tariff-related challenges.

The US will likely continue with its tariffs, while other countries retaliate, creating volatility that may push inflation higher, he told NDTV Profit.

This volatility is also fueling concerns about stagflation, a combination of stagnation and inflation, said Peter Cardillo, chief market economist at Spartan Capital Securities. As a result, commodities like gold have seen price increases, as investors seek safe havens.

On the global stage, tariffs are affecting different regions in varying ways. Jonathan Barratt, chief investment officer at ETO Markets, stated that the long-term volatility caused by retaliatory actions between the US and other countries could push inflation higher.

The Fed’s current stance on inflation and rate cuts seems relatively non-committal, likely due to the uncertainty surrounding how tariffs will ultimately impact the broader economy, Barratt noted.

The Fed on Wednesday said that it is prepared to adjust policy if risks that could impede its goals emerge, as trade tensions rise under US President Donald Trump's administration. Trump has floated new tariffs on major trading partners, adding to concerns over growth and inflation.

The Fed Chair noted that a "good part" of the higher inflation expectations was due to the tariffs imposed by Trump. "Clearly some of it, a good part of it, is coming from tariffs,” Powell said.

In the global context, the repercussions of the US tariffs are not uniform. Davies observes that Europe may be better positioned in terms of inflation and rate cuts, as its central bank has more room to maneuver. Some emerging markets, particularly India, might have the flexibility to cut rates without facing significant domestic consequences.

While India may escape the most serious consequences of US tariffs, retaliatory actions from other countries could further disrupt the global economy. The question remains: how hard will these tariffs hit international trade, and what will the knock-on effects be for global markets?

The recent market rally in US can be largely attributed to the Federal Reserve's policy stance, particularly the comments made by Jerome Powell. Cardillo highlights that markets welcomed Powell's statement as it didn’t hint at an impending recession or an immediate economic slowdown. While the Fed's updated economic forecasts did show some signs of a slower economic trajectory, the general sentiment was positive, particularly because the Federal Reserve’s dot plot indicated that two rate cuts were already priced into the market.