“Is Inflation ‘Transitory’?”

Tariffs, Tight Money, & A Hard Landing?

“Our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem…”

“…without price stability, we cannot achieve long periods of strong labour market conditions…”

[tariffs announced so far have been] “significantly larger than anticipated”… …“the same [is] likely to be true of the economic effects, which will include higher inflation and slower growth”.

Source: Jerome Powell, Economic Club of Chicago, 16 April 2025

The consensus view is that the US is about to roll into recession. That was highlighted in this week’s BAML fund manager survey. A ‘hard landing’, for example, is now the ‘central case’; the US ‘profits outlook’ is the worst since November 2007; and global ‘growth expectations’ are at a 30 year low (e.g. see FIG 14 below). Gold is expected to be the best performing asset this year (in December it was US equities).

That recession view reflects a mix of factors: Most notably (i) Trump’s ‘tariff shock’; which is happening against a backdrop of (ii) softening growth coming into 2025; and (iii) tighter fiscal policy under this new administration (at least initially/this year). Of note, regarding fiscal tightening, US job growth has been mostly driven by government spending in the past 12 months (FIG 13). Trump is now turning off the ‘fiscal taps’ and, as such, the labour market should weaken further (see below for full analysis).

Importantly, for the recession argument, the Fed is no longer expected to ‘save the day’. That is, their hands are tied because tariffs are inflationary. Confirming that view, inflation expectations spiked to a 35 year high this month (FIG 1)…