On Wednesday, The Federal Reserve announced that it would hold the fed fund’s rate. While Interest rates will not change, quantitative tightening will slow by $20 billion a month. This effectively loosens financial conditions.
During the question period, Fed Chair Powell minimized the market’s fear of Trump’s tariffs. The Chair said that tariffs would likely increase prices and add uncertainty. Although he did not know how much inflation it would cause, those price changes would be “transitory.”
Fed Chair Powell previously characterized inflation during the pandemic as transitory. Prices went on to rise by above 9% at its peak. Investors reacted bullishly to the comment. Technology stocks led the markets higher. Broadcom (AVGO) added 3.66%, Tesla (TSLA) gained 4.68%, and Netflix (NFLX) gained 3.17%.
Inflation rates are for the most part transitory. Yet cumulative inflation does not fall. Prices increased by a double-digit percentage over the last five years, for example.
Consumer spending drove inflation during Covid; consumers spent their stimulus checks. This time, tariffs simply raise the price of goods. Starting on April 2, expect Mexico and Canada to respond with reciprocal tariffs.
Investors are expecting companies to pass higher costs to consumers. Demand for goods will fall and consumer defensive stocks will under-perform as demand falls. Watch for stocks like Proctor & Gamble (PG) and General Mills (GIS) to trade at lower prices. If that happens, they are attractive buys.
