Tariffs Get Delayed

MONETARY

• In its most recent FOMC meeting, the Federal Reserve opts to leave its Federal Funds Target Rate unchanged at a level of 425-450bps – a move that was widely expected by markets¹
  • During the post-meeting press conference, Fed Chairman Jerome Powell gave additional insight into many factors affecting the current state of the U.S. Economy¹
  • Regarding the state of the labor market and the recent effects it has had on the inflation backdrop¹
    • (Powell) “At the same time, we don’t need to see further weakening in the labor market to achieve that goal, and that’s kind of what we’ve been getting. The labor market has really been broadly stable, the unemployment rate has been broadly stable now for six months. Conditions seem to be broadly in balance. And I would say look at the last couple of inflation readings and you see, we don’t, we don’t overreact to two good readings or two bad readings, but nonetheless, the last couple of readings have suggested more positive readings. So, I think we’re, I think policy is well positioned”¹
  • On the topic of newly implemented tariffs potentially complicating monetary policy decisions moving forward, Chairman Powell reiterated the Fed’s wait-and-see approach¹
    • (Powell) “Well, I’d say you see expectations moving up a little bit, at the short end, but not at the longer run, which is where it really matters. And those could be related to, could be related to what you mentioned, some of the new policies. I think where the Committee is very much in the mode of waiting to see what policies are enacted. And we don’t know what will happen with tariffs, with immigration, with fiscal policy, and with regulatory policy.”¹
  • Regarding the state of the consumer as it relates to being able to absorb further price increases¹
    • (Powell) “We’ve just come through a high inflation period, and you can argue that both ways, you can say that companies have figured out that they do like to raise prices, but we also hear a lot from companies these days that consumers have really had it with price increases, and so, I don’t know how that shakes out.”
  • Chairman Powell also noted that a changing international trade landscape also makes this economic situation very different from the backdrop in 2018 when the Trump Administration first enacted tariffs¹
    • (Powell) “In addition, the trade, the kind of footprint of trade has changed a lot as trade is now spread around the — it’s not as concentrated in China as it was. There was a lot more manufacturing, it moved to Mexico and other places. So, so there were differences, and I just think the range of possibilities is very, very wide.”

 

GEOPOLITICS

• Trump Administration begins the process of implementing tariffs on a variety of countries including China, Canada, and Mexico³
  • Proposed tariffs would be as follows³
    • Blanket 25% tariff on all goods imported from Canada³
      • Canadian energy goods would be subject to a special tariff rate of 10% under the proposal³
    • Blanket 25% tariff on all goods imported from Mexico³
    • Additional 10% tariff on top of the existing 25% tariff rate on all goods imported from China³
  • As part of the international tariff negotiation process, Trump Administration agreed to delay the implementation of tariffs on Canada and Mexico for a period of one month in return for concessions on increased border security and enhanced enforcement on drug trafficking efforts³
    • Prior to the pause agreement, Canada had proposed retaliatory tariffs of 25% on $30B worth of U.S. imported goods³
      • Canada agreed to provide $900M for enhanced border security, technology, and personnel. Additionally, Canada has created a dedicated task force to combat fentanyl trafficking³
    • Mexico did not provide specific details on its retaliation plans³
      • Mexico will send 10,000 troops to the U.S./Mexico border to help enforce border security³
  • The U.S. and China did not come to an interim agreement to hold off on tariffs, and as such those tariffs are now in effect³
    • China responded to the newly implemented U.S. tariffs by imposing retaliatory tariffs which include³
      • A 5% tariff on coal and liquefied natural gas products³
      • A 10% tariff on crude oil, agricultural machinery and large-engine cars³
      • China will also open an investigation into Google as part of their retaliatory efforts³

 

MISCELLANEOUS

• Chinese AI firm DeepSeek releases a brand new artificial intelligence chatbot that meets, even sometimes exceeding, the performance of the cutting edge models produced by AI firms in the United States²
  • In what appears to be a major shakeup with the world of artificial intelligence, it seems that DeepSeek was able to produce its new model (named R1) at a mere fraction of the cost that U.S. firms require to produce such models – although this claim has been disputed²
  • Additionally, DeepSeek has made their R1 model open-sourced so that anyone can use the model for free²
  • The release of the DeepSeek R1 model also raises questions as to how a firm operating in a country under major technology import restrictions could produce a model of this caliber²
    • Major publicly traded companies in the AI field saw a significant selloff upon release of the DeepSeek R1 model as investors start to rethink the competitive advantage these firms may possess in the AI space²

[See Below for Disclosures & Annotations]

 

DISCLOSURES

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The companies presented here are for illustrative purposes only and are not to be viewed as an investment recommendation.

Tax laws and regulations are complex and subject to change, which can materially impact investment results. LPL Financial does not provide tax advice. Clients should consult with their personal tax advisors regarding the tax consequences of investing.

 

ANNOTATIONS

1. The Federal Reserve. “Transcript of Chair Powell’s Press Conference”. January 29, 2025
2. TechTarget. “DeepSeek explained: Everything you need to know”. January 30, 2025
3. Reuters. “Trump in no hurry to talk to Xi amid new tariff war”. February 5, 2025