Last month, the Federal Reserve abruptly changed the pace of its interest rate cuts. Though it cited elevated, stubborn inflation, the central bank has several worries about Donald Trump’s trade policies.
The S&P 500 (SPY) and iShares Russell 2000 ETF (IWM) are down from last month’s highs. The broader market and small cap sector are pricing toward higher inflation in the near term. After winning the election, Trump increased his threats to impose 25% tariffs on Mexico and Canada.
The Fed is likely forecasting the reciprocal tariffs levied against the U.S. would cause the price of goods to rise. In the last few months, food stocks like Coca-Cola (KO) and PepsiCo (PEP) trended lower. PEP stock is barely 1.0% above its 52-week low. Even Mondelez (MDLZ), whose stock has a P/E of 20.7 times, continued to fall.
Higher inflationary pressures will hurt the demand for food. Consumers will buy only necessities, like milk and eggs. They will give up snacks and soft drinks offered by Pepsi and Coke.
Trump’s immigration policies will pressure the already fragile U.S. job market. Companies, unable to fill job vacancies with qualified workers, will have fewer people to pick from. This would heat up the job market. As wages rise, it would add to inflation.
For now, watch the core PCE, which is 2.8% and above the Fed’s target. The Fed must fight inflation first and worry about Trump’s policies later.
