Will The Fed Sink Economy With Tariffs Response? (Uncut) 02-20-2025

Will The Fed Sink Economy With Tariffs Response? | Danielle DiMartino Booth

Danielle DiMartino Booth returns to the show. She’s the CEO of QI Research. We’ll be talking about the Fed Minutes that came out today on the 19th of February and what’s happening next with Fed monetary policy, economic growth, and the impact of tariffs on economic growth.

Welcome back to the show, Danielle. Good to see you. Great to have you.

Great for you to have me again, David. Good to be here. You’re in a great studio.

Nice looking background. So I appreciate you doing that. I am not in a good looking background.

I am in the opposite of what you are in. I’m in a hotel room traveling in Asia. But I think the two of us balance each other out quite well.

Let’s take a look at my screen now. This is from CNBC. The Federal Reserve officials in January agreed they would need to see inflation come down more before lowering interest rates further and express concern about the impact of Trump’s tariffs.

Policymakers on the FOMC unanimously decided at the meeting to hold their key policy rates steady at the last FOMC meeting. This is the minutes that came out for January. Recent indicators suggest that economic activity has continued to expand at a solid pace.

The unemployment rate has stabilized at a low level in recent months. Now, let me just comment on their overall attitude towards tariffs before we talk about their actual policy. How concerned are the Fed in regards to tariffs? Several times over the last couple of FOMC meetings, reporters asked Powell, what do you think of tariffs? What’s going to happen? What is your policy going to be in response to tariffs? And several times he answered, we’re going to wait and see because they don’t know exactly what these tariffs are going to be.

So what do you think? Well, I think Powell is correct to say they don’t know because they don’t know to the extent that they had similar fears in 2019 when Trump first sent out that very first tweet back in April of 2018. The consumer price index was, I want to say it was at 2.5 percent. And, you know, by the time that I might be misquoting myself, it might have been three and a half percent headline.

Regardless, by the time they got to the end of 2019, the CPI was lower and not higher. And what the Fed discovered in that episode, 2018 into 2019, was that the slowing effect, the governing effect, the tariffs it had on global trade was enough to slow the economy to a greater extent than inflation had flared. Because, again, inflation was actually down on a year over year basis by the end of 2019.

So there are a lot of competing philosophies right now. You can tell that there’s the potential for a lot of dissent on the FOMC. And the Minutes are trying to to bring all of these voices together as one saying, we’re going to wait and see if we see more progress on the inflation front.

And I think that they believe what they’re saying. And certainly I think that’s where Powell wants to go. But so far, we have no reason to think that we would see fallout from tariffs because nothing has even been implemented thus far.

What do you think is going to be the impact of tariffs on the economy? Will it be inflationary or deflationary? On the one hand, prices coming in from tariffs will be higher in the short term. But one could make the argument that maybe tariffs could slow down economic growth, thereby becoming disinflationary. You could easily play it both ways.

And it’s going to depend on the magnitude and the persistence of the tariffs. If it’s a one time shock to the system, then it will filter in and out of the data within a very short period of time. If it was to be death by a thousand cuts and for there to be, you know, kind of a constant trickling in of ever increasing tariffs, then that would certainly build into an inflationary impulse on its own.

But we’re just going to have to wait and see what form they take. In addition to the fact that we’ve got job cuts going on in the public sector, some very good paying jobs are being destroyed right now to the extent that these individuals were part of the voluntary buyout, the seventy five thousand employees who took the voluntary buyout. They’ve got obviously a steady income through September.

So they’re a little bit safer. But we’re hearing every single day we see yet another headline cross of this number of layoffs in this agency and that number of layoffs in another agency. We heard earlier this afternoon that the Department of Government Efficiency is aiming to cut the Department of Defense budget by five percent, excuse me, by eight percent over the next five years.

That’s that’s a big ticket item. And again, for all of the cost cutting that occurs to the extent that it’s not pumped back into the economy by some other means, it’s going to be disinflationary. So let’s talk about the unemployment rate.

Since you brought it up, the DOGE, the Department of Government Efficiency, cutting across the board, how is that going to be reflected, you think, in payroll numbers and jobless claims over the next couple of weeks? This just started. I wonder if this will have a material impact. Well, you know, we’re going to have to wait and see.

There are in addition to what we’re seeing coming out of the public sector, we’re already running at about 100,000 job cuts that have been announced in the private sector so far in the month of February. It’s going to come down to a factor that we’ve had at play to a great extent since Amazon years ago started that first big round of white collar layoffs, and that is severance. So depending on where you live and how this and how state laws dictate whether or not you can claim unemployment benefits or if you have to wait for the severance to be paid out before you can make that initial jobless claim, we’re going to see.

But again, we know that there were 75,000 voluntary buyouts. Those did have severance attached to them. To the extent that people are just being laid off, then we could expect to see a very quick build possibly in initial jobless claims and certainly an uptick in the unemployment rate when that data is set to hit, I believe it’s March 7th.

So when, let’s suppose you’re right, and let’s suppose the jobless claims increase as a result of public sector layoffs, do you think the Federal Reserve will look at that data and be concerned about the public sector layoffs? That will be reflected in the payrolls numbers. You’ll see which sectors are most impacted. The public sector, is that something that the Fed is concerned about? Well, the Fed has to be concerned about aggregate income and all jobs generate income into the aggregate income figure in an economy where 70% of GDP is consumption.

So the Fed certainly has to be concerned. We know that in 1981, after Ronald Reagan came to office and pushed through some, at the time, pretty dramatic job cuts at the federal level, that that pushed the U.S. economy back into a double-dip recession that it had come out of just six months prior. So whether it’s a public job that’s being cut or a private job that’s being cut, history tells us that the Fed has to be mindful of both.

Because again, every single job in America generates income to the extent that that job no longer exists, that income is no longer being generated. And the Fed must attend not just to its inflation mandate, but also to its employment mandate. Before we continue with the video, let me tell you about a serious problem affecting millions of people worldwide.

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Go to joindelete.me.com slash David Lin in the link down below or scan the QR code here to get started and get 20% off on all U.S. plans. Take back your privacy today. So it says also, in particular, participants cited the possible effects of potential changes in trade and immigration policy, the potential for geopolitical developments to disrupt supply chains, or stronger than expected household spending.

Which of those that I just mentioned, household spending, immigration policy, or geopolitical developments, would have the most impact on economic growth? Yeah, it’s really, it’s very difficult to say. You know, they’re mentioning household spending. They’re mentioning the state of household budgets.

I think that has to do with the fact that the New York Fed put out a report last week that showed that household debt had crossed the $18 trillion milestone for the first time, and that household delinquencies, credit cards, automobiles are rising. That same New York Fed report said that student loans are going to be reported delinquent for the first time beginning at the end of the current quarter. So I think the Fed is definitely mindful of its own in-house New York Fed data on households, as well as the potential for supply chain disruptions that could cause inflationary impacts on the other side of their mandate, to the extent that that does indeed filter through to inflation.

We can’t say at the moment. There are a lot of things. It’s interesting that geopolitics came into the discussion in these Fed minutes.

That, to me, nods to the state of flux that we’re in with Ukraine and with Putin and Russia, and the fact that we are talking about the breadbasket of the world there, and something that we were talking about with great frequency just a few years ago, and to the extent that there’s going to be disruption there and or in our supply chains in the traditional sense as goods coming into the country were hampered. We certainly never did have to experience that on our borders. But again, we don’t know what form these are going to take.

We don’t know if this is just going to be a trade with China situation, or if we’re going to start to see disruptions along our southern border and our northern border. Is it lumber that’s going to be affected? Is it auto parts from Mexico that are going to be affected? We’re in a wait and see mode right now. This is a CME Fed watch tool.

No cut is expected by March. No cut is expected by May. It isn’t until June, the June meeting, that we’re starting to see an above 40% chance of a 25 basis point cut.

And then pretty much the same thing for July. So not until the summertime are we going to see another cut. Do you agree with that assessment? David, I think it depends on how quickly or not this shock to the labor force manifests in the several unemployment reports, payrolls data.

We’ve got another big revision as well coming down the pipeline that we will see how that affects the back data. But again, I sound as data dependent as a central banker. And I’m not trying to say on the one hand or on the other hand, but what comes out of this Bureau of Labor Statistics is anyone’s guess in any given month.

And it’s certainly not a reflection of what’s going on on the ground for U.S. workers. How resilient or robust is the private sector job market right now? Are they, is the public market, sorry, is the public sector layoffs, are those going to be absorbed by the private sector right now, do you think? Well, if you’re asking me that question right now, I would have to say no. Word hit the wires today that UnitedHealthcare was talking about voluntary buyouts to the tune of 25,000 employees.

We saw Chevron just come through with a large layoff announcement, Nissan, same thing, as well as the blowback from a lot of mergers and acquisitions. We just saw Southwest Airlines announce its first layoffs in its 53-year history. And the private sector layoff tally right now is about 100,000.

And that’s certainly not indicative of a private sector, to use your verb, that’s capable of absorbing the individuals coming out of the public sector. If anything, they’re going to be, these private, these public sector employees are going to be presenting a form of competition to others in the private sector who continue to look for jobs, who represent the millions of Americans who are collecting, continuing unemployment benefits, being at the highest level since 2021. Let’s take a look at what happened today with the markets.

A little change for the NASDAQ, S&P as well. The dollar, a little change. Yields are staying put, so not too much of a reaction to the minutes.

The Tanger yield, let’s talk about that. How are you expecting the bond market to react to the ongoing geopolitical situation that we discussed, referenced earlier, and also, of course, the tariffs that we’ve discussed? A lot of uncertainty. Do you think this uncertainty has probably priced into markets right now? I don’t.

I don’t think the uncertainty is priced into markets in any way. In fact, right now, if you were to talk to me about the 10-year bond yield, it looks like it’s a deer in the headlights. It looks like it is completely frozen at 4.5%, not knowing which direction Fed policy is going to take next, not knowing whether or not the policies that are coming out of the new administration are going to be inflationary, whether they’re going to be deflationary, whether the job cuts are going to be offset potentially by a one-time check sent out by the Department of Government Efficiency.

Again, if we’re in the business, David, of following headlines right now, then the best that we can describe ourselves is slightly schizophrenic because that’s the pace at which these headlines are hitting and the differing messages that are being broadcast depending upon which headline is hitting and when. And again, I would reiterate that the headlines are coming out almost at the same fast pace as that for the private sector. As for the public sector, we saw Rivian, a multibillion-dollar company today file for Chapter 11 protection going to bankruptcy.

On the private side, we’re seeing the bankruptcy cycle escalate and amplify into 2025. Again, behind all of these announcements, behind all of these layoffs, whether it’s public or private, there are individuals involved. And again, we are a nation of what we consume.

And aggregate income is critical to where this economy is headed. It’s critical to what businesses are going to do going forward. And one of the things that I would point out, here’s a detail for you.

To the extent that the private sector is encouraged at the idea of less red tape, lower regulations, lower taxes going forward, the promises that were made in this campaign, until they see these actual incentives to invest, to the extent that they’re seeing public sector layoffs, they’re going to be continuing to pull back and they’re going to remain in a cost-cutting mode. I think you meant Nikola is going bankrupt. Sorry, Nikola.

Sorry, not Rivian, Nikola. Wrong. Apologies.

I’m a fan of Rivian trucks. I was like, wow, that’s terrible. No, no.

Sorry. You’re right. Nikola.

Nikola. Yes. To your point, the private sector is seeing some turmoil, especially around tech.

Okay. So what do you think is going to be the Fed’s next move? I mean, we’re speculating here. We don’t know.

They don’t know. Ultimately, do you think they’re looking at trade and fiscal policies as something that will drive economic growth or contraction, given so much uncertainty? I mean, let’s just take a step back. If we remove all this uncertainty around trade, immigration, tariffs, what else is driving the economy that’s fundamentally important for the Fed to be following? Well, I think the Fed should be following, and I think that Fed officials, Jay Powell and Christopher Waller, have been speaking in recent months that they’re following the balance between supply and demand in the U.S. housing market.

We’re seeing apartment vacancy rates hit the highest level that we’ve seen since 2018. The supply of apartments continues to pour into the market, which is pulling rents down. So on a fundamental level, if we were to even just net away from the entire discussion, what’s happening in the public sector and with fiscal policy and the Department of Government Efficiency, on its own, the private sector continues to shed jobs.

And on its own, we continue to see a rising level of supply, whether you’re talking about in the rental market or in the single family housing market or new home sales. So if it’s supply and demand that dictates Fed policy, I think right now the overriding influence is disinflationary in nature. Again, we’re talking about the private sector on its own.

If we were to be able to kind of put on noise-canceling headsets and kind of just take the noise of what’s happening in Washington, D.C., away from the equation right now, the Fed is still looking at a slowing economy, rising layoffs, rising bankruptcies, and disinflationary impulses coming from the largest input to inflation metrics, that is housing, shelter. Well, let’s talk about Scott Besen’s ultimate objective, which is to reduce the deficit relative to GDP. These cuts that the Doge is making, a couple of million dollars here and there, is that sufficient overall? Keep in mind mandatory outlays like Social Security, Social, Medicare, Medicaid, these things aren’t being cut.

No, they’re not being cut. And I don’t think that there is going to be any kind of existential threat to Medicare, Medicaid, Social Security recipients. But to the extent that we can see something in this century in terms of IT technology come in and make sure that we’re not paying dead people Social Security benefits, make sure that there’s no fraud in the system, I think that you can actually end up saving hundreds of billions of dollars just by modernizing the technology of the U.S. government in addition to what’s being discussed in terms of cutting waste.

The deficit being cut, reduced, ultimately, do you think that will be a feasible objective? It’s a lot of heavy lifting if you’re talking about the first fiscal quarter of 2025, you know, seeing a deficit that was running at 7% of GDP and Treasury Secretary Besen’s goal is to get that down to 3% of GDP. That is a huge reduction in government spending, even if you were to roll in the theoretical one time $750 billion, $800 billion bump from revaluing the nation’s gold holdings. Even so, it’s still a huge order.

And don’t get me wrong, I think for long-term health of the country, we need to be on stronger fiscal footing. And I applaud Scott Besen’s every move that he can make. But I don’t necessarily think that the actions that he takes are not going to have consequence in the immediate and near term for the U.S. economy.

So let’s talk about taxes now. Take a look at this article from Bloomberg. Trump backs a $4.5 trillion tax cut in House GOP budget plan, slapping back Senate Republicans’ efforts to rush through funds to help bolster his immigration crackdown in favor of a larger bill that will likely take months to negotiate.

Trump intervened in the ongoing budget conflict between House and Senate Republicans with a social media post on Wednesday. They’re backing the Senate plans to vote this week on a budget that would add $150 billion to military spending and increase immigration and border enforcement by $175 billion. So this goes back to my earlier point about DOJ and they’re cutting things in their periphery.

But if you look at other departments, spending is starting to increase. And at the same time, Trump is backing a tax cut plan. So I wonder whether or not this has any material impact on the deficit whatsoever.

We’re not going to see a reduction in the deficit at all, is the concern by a lot of economists, because tax cuts and spending increases at the same time don’t mean a deficit reduction. No, David, I’m not going to argue with a single word you said. That’s how math works.

1. It is what it is. I mean, you know, look, you can talk all you want about extending extending the tax cuts.

Even that is going to be four and a half, five trillion dollars or so. And that’s just preventing a negative shock to the economy by extending tax cuts. If you’re talking about deeper tax cuts going forward and allocating more to spending, it’s got somehow it’s got to be paid for.

Generally speaking, where do you stand on this debate about whether or not deficits were rising deficit or even just to maintain a maintenance of the current deficit level? Is that inflationary or deflationary? So I don’t think that that maintaining deficit spending necessarily is inflationary, depending on how the money is spent. If you were to just be, again, extending tax cuts, that’s not going to be inflationary. It’s going to prevent a deflationary shock, which causes companies to invest less.

So that is preventative, if you will. But it is certainly not inflationary. If, however, the the increase in the in deficit spending was to be in the form of what Ben Bernanke would describe as helicopter money, money directly deposited into the accounts of U.S. households, that would be inflationary and it would be inflationary overnight.

That’s what we learned in the post pandemic era about giving American households cash money to spend bypassing the system as an arbiter of credit into the system. You give Americans cash. It’s going to be spent.

You’re going to get inflation. You’re going to get it overnight. And it’s not popular.

Let’s comment on Trump’s immigration policy and how this may or may not impact the labor market. So a couple of changes, according to the BBC article here, six big six big immigration changes under Trump, the first being the deportation of migrants, as you know, tighter border security across the U.S.-Mexico border, halting the process of migrants and asylum seekers and so on. So what does this do to the labor market, if anything? Well, you know, on this day that we’re speaking and you’re clearly not asleep in Hong Kong, we did get the latest data out from the architectural from architectural billings, and it is showing that that that demand for new designs in the non-commercial space remains in contraction.

We know that, again, that there is a lot of pent up existing home supply coming onto the market. We know that that home builders are sitting on more inventory than they would prefer to have as well. What I’m trying to say is in the short term, there is not a burning need for more construction workers, and that would certainly be where it would hurt the most.

Now, is this something that the economy can withstand if workers who are being who are leaving the United States are not somehow offset when we begin to see an expanding economy again? And what happens if we don’t have enough skilled workers right now? I would argue that the work is not there for them, that we’re seeing construction job openings, in fact, in federal data absolutely collapse. So right now it’s kind of a neutralized effect, if you will. But to the extent that we have Americans beefing up their travel budgets and we’re in an expanding economy and we’re deporting people who, you know, work as as in house cleaning at hotels and as dishwashers and as individuals who mow lawns and shovel snow, you know, that will have an effect to the extent that Americans don’t want those jobs.

And I will I’ll leave a big dot dot dot at the end of that sentence. Would you go as far as to say that you would short home building stocks right now as a result of what you just said? Well, I think I think the market has certainly beaten the tar out of home building stocks. That’s one of the calls that we’ve had told brothers came out and said that it was outside the high end, that it was not moving as much product as it would have wanted to see.

I certainly don’t think home builders anticipated that mortgage rates would be as high as they are as they’re getting ready to round a year to the second year anniversary of buying rates down. So I would certainly when it comes to home building stocks, I’m not going to make any individual calls, but I would only want to be exposed to the names that are the absolute most efficient operators out there, because I think their business models are beginning to be very compromised because we’ve had higher for longer. As long as we have, we’ve had the Fed not lower rates as much as what had been anticipated at this point.

We haven’t brought up energy even once. The policy that the administration is pursuing is to somehow and I term somehow lower the energy price, thereby lowering the gas price at the pump, presumably then making it easier for consumers to go about their daily lives if they drive. This should, in theory, lower inflation.

Do you think that’s possible? Being from Texas, I hear, I won’t say on the grapevine, I hear on the pipeline that drill baby drill will only work to the extent that the drillers can do so profitably. And at last check, the vast majority of U.S. refineries refine imported heavy sweet crude, as opposed to the light sweet crude that’s pulled out of U.S. formations. And that’s one of the reasons that we’ve seen the decline that we have in rig counts.

So again, energy companies are in business to make a profit and you can’t force them to drill and you certainly can’t force what’s drilled out of the ground necessarily to be refined and consumable by U.S. households if we don’t have the refinery capacity. Campaign trail slogans are great. How they work in practice is proving to be a little bit different as we have West Texas Intermediate seemingly stuck somewhere around $70 a barrel.

Well, let’s finish up then on asset allocation and your investment applications. What would you prefer to be invested in given the current state of uncertainty right now? So we’re starting to see a proliferation of companies cutting their dividends. And there’s certainly some question about the investments that have been made by the biggest players in the technology space, whether or not those investments were wise to the extent that that artificial intelligence can possibly be accessed for much less in the way of energy output.

We have yet to see whether or not Deep Seek is going to fully work in practice. I think we’ll be able to check the Chinese weather forecast since it looks like the meteorology community in China is now going to be adopting Deep Seek. My point is when it comes to portfolio allocation, I think we need to be mindful of the fact that the business models, the assumptions that have been used that have propelled passive investing and rewarded investors for just owning those top seven stocks, I would say be very careful about that because their business models are being called into question and to be defensive in your posturing and to own companies that pay a nice dividend and you’re sure can maintain that nice dividend that are not necessarily in a cost cutting mode or threatening to slash their dividends.

Again, Google it, you’re seeing quite a few dividends being cut right now. So I would look to make sure that what you’re invested in can weather recession and can continue to generate cash flow. Okay.

So you like yield, you like cash flow. Do you like fixed income right now then? I like safe fixed income. So I think that we have not seen cracks in high yield, but we’re certainly seeing the Financial Times had a great story out yesterday that shows that US loan delinquency rates are absolutely going through the roof.

So you got to be careful when it comes to whether you’re choosing a stock that’s paying a dividend or a corporate bond that is that is throwing off a coupon income. You just have to be very careful and make sure that that’s money good because now is not the right time with spreads on high yield bonds on junk bonds being at some of the most razor thin levels in the history of the market. Now is not to necessarily be time to be playing in junk land.

Okay, perfect. Tell us more about your work and where we can find you. So please follow me at Demartino Booth on what we once called Twitter and I’d love to have you also as a daily feather reader, demartinobooth.substack.com. We’ll put the links down below.

Follow Danielle there. Thank you very much for joining us today on Fed Minutes Day. Take care.

Take care. And thank you for watching. Don’t forget to like and subscribe.