Fed Watch – 3/28/2025

The below transcript is a literal translation of the podcast audio that has been machine generated by Notta.

Hello everyone, I’m Michael Feuz. Welcome to this episode of FedWatch. Today is the March 28th edition.

So we are a few days out from that April 2nd deadline where we’re going to get another major tariff example, but again, who knows for sure, the way things are going. There’s been just a lot of that start, stop, yes, no, look over there, maybe. And that has certainly been the rhetoric from the Trump administration regarding tariffs and it’s really created a lot of uncertainty.

There is a really, at least from my perspective as an economist, a fun series or two that we can look at. There is the economic policy uncertainty index and the trade policy uncertainty index. Thinking about the first one, that economic policy trade one, you see a huge spike thinking back to 2008 when really September of 2008, when it ticks up. And if you remember back then, that’s when the Lehman brothers collapsed, we got the bailout, no one knew what was going on. Fast forward, March and May of 2020. We all know what was going on there. It spiked again. Why? Because we had COVID, the pandemic, we had two weeks to flatten the curve. It certainly did not work out that way. Again, a surge in uncertainty.

This time around now, both of those series, the economic policy uncertainty and the trade policy uncertainty have both spikes. And if someone tried to tell you that they knew what the economic and trade environment was going to be six weeks out or even six months out, we would laugh at them.

So, this in and of itself is an obstacle if you’re running a business. When you create this much uncertainty around what the policies will be, there is going to be a cost. Running a business in this environment is a challenge if you want to expand your business, if you want to open a new factory, if you want to expand your product line, and you don’t know the economic or trade policy, it’s likely going to cause some hesitation with your plants.

Looking at non-defense capital goods, new orders, excluding aircraft. This is the measure of B2B activity or CapEx spending. It’s been trending relatively flat now for some time on a growth rate perspective and its overall growth in the U.S. economy. And we’ve been forecasting that flatness to more or less continue through the first half of this year and then start to pick up in the second half. This trade policy uncertainty does not abate, if there’s a risk it could bleed over into that third quarter, we’re worried our forecasting things beginning to pick up in the second half of the year. That’s certainly a risk that that activity just won’t materialize if we don’t get some clarity. So April 2nd, obviously we can hope for some clarity and some certainty on things stabilizing so we can start planning over the next four years.

Coming out of the last Federal Reserve meeting, which was on March 19th, the Fed kept its benchmark interest rate unchanged, but it did signal two more rate cuts to come. Eight out of the 19 members on that dot chart did put their dots where they don’t expect there to be a rate cut, but 11 did. Chairman Jerome Powell, he noted explicitly there are no hurry to move rates yet we still have a slight majority saying they expect two rate cuts. Now additionally they raised their inflation expectation 2.7 percent and Jerome Powell also noted they expect higher inflation due to tariffs. I think towards the end of last year the expectation was 2.1, it increased somewhere between 2.5 and 2.6. Now they’ve moved it up to 2.7 and tariffs being a key reason to that move. So with that we’re waiting to hear what is communicated out on April 2nd, which it may be that time when you’re listening to this video.

But it sounds a little, there’s a lot of apprehension, we obviously talked about the uncertainty. It’s important I think to remember even with this uncertainty and with the media sensationalism ramping up. For those of us here in the US, we live in the richest nation and largest economy in the history of the world. Uncertainty is a problem, but the US will continue to grow for the rest of this decade.

President Trump also has announced On April 2nd, that there’s gonna be a 25% tariff on all imported cars and key auto parts inputs. The goal here is to boost domestic auto manufacturing. I’m mentioning this because we got some early insights into this announcement from BMW on how they’re planning on responding to this tariff. BMW has manufacturing in the US and they have it on, I think I believe, eight or nine other countries across the US. The announcement came in regards to the six vehicles they produce in their Mexico plant. They announced one, no price increases until May 1st, and then there’ll be a 4% price increase on those six models. You probably noticed right off the bat, that 4% increase isn’t anywhere close to 25%.

What gives? Generally, a tariff’s attacks and the nature of the good depends on who pays that tax. You never see the entire burden go to the consumer. You never see the entire burden go on to the producer. It’s always a split. If there are substitute goods readily available, more of the burden is gonna be put on the producer. In BMW’s case, there are clearly plenty of substitute goods. Hence they’re choosing to absorb more of the burden. But no matter what the price of the tariff or tax, it’s gonna be paid by both the producer and the consumer. That nature of the good determines who pays more.

In your own business, as we get more clarity on tariffs, just develop that tariff strategy playbook. Have a plan to cut costs if you’re gonna be impacted by tariffs. Costs that don’t impact your long-term strategy. Aggressively raise prices, but be aware of what substitute goods are out there. Can there be a pivot that could limit your ability on how you can raise your prices? Be as USA centric as possible in your sourcing so you can avoid tariffs and secure your supply chains so you are resilient against the uncertainty.

Despite all this uncertainty, the vast majority of leading indicators are still pointing to and saying the economy is gonna grow in 2025. Be prepared for interest rates to generally remain stable. It’s unlikely we’re gonna see much easing from the interest rates, perhaps a little bit in June to September, but it won’t be any meaningful decline. The key now is to time any investments, more so based on when you need the art, when to start recouping the ROI on that investments, over trying to time that sweet spot with interest rates.

With that, I’ll leave it there. Again, I’m Michael Feuz, economist here at ITR Economics. Thank you for joining me on this March 28th edition of FedWatch. I look forward to speaking to you all again soon. Thank you.