Caution prevails as on-again, off-again and on-again US import tariffs and their effects on the economy and inflation keep consumers and financial markets on the sidelines. The US Federal Reserve wants to wait for the dust to settle and is not pursuing interest rate cuts for now.
A majority of respondents in the latest monthly survey of consumer sentiment by the University of Michigan were cautious on the outlook for the economy: The consumer sentiment index dropped to 57.9 in March, marking its lowest since January 2023.
Regardless of their political affiliation, about half of the US consumers surveyed might pull back on spending, the survey found. That reflects their bearish outlook on employment for the next 12 months. As a result, one can expect consumers to start saving more.
The uncertainty over Republican President Donald Trump’s tariffs war is not helping sentiment on the outlook for growth. His policies no longer appear to give investors the same confidence in the economy’s prospects and the outlook for company earnings as his campaign pledges did.
Crucially, the administration seems ready to bear any fallout from the trade war for longer than the markets had expected.
For now, the Fed is reluctant to lower rates pre-emptively, even as it adjusts its forecasts to reflect a likely tilt in the US economy toward slower growth and at least temporarily higher inflation. After the policy meeting on 18-19 March, Chair Powell described the uncertainty policymakers faced as ‘unusually elevated’. Policymakers projected prices would rise faster than previously expected at least in part, and perhaps largely, due to President Trump’s plans to impose duties on imports. It held its benchmark rate steady in the 4.25%-4.50% range.
After the decision, President Trump maintained his pressure on the Fed, saying it would be ‘much better off cutting rates’ as the tariffs worked their way into the economy.
While we are not calling for a recession, disruptions from US trade policy will likely continue to impinge on sentiment and make consumers and businesses more wary of spending and investing.
