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Stock indexes continue to dance around all time highs while crypto experiences typical volatility with bitcoin 15% below its recent all time high.

As per usual, the US is driving action.

Trump is threatening reciprocal tariffs for all major trade partners, hoping ultimately to improve domestic industry and production conditions by eliminating tariffs altogether in all of our key relationships.

Also in the US, markets digested minutes from the last Federal Reserve meeting. A revelation that the Fed may soon stop selling treasuries and leave more assets on its balance sheet gave markets a reason to rally to close on Wednesday.

Trump’s Reciprocal Tariff Plan Sparks Global Trade Jitters

Synopsis

President Donald Trump has unveiled a sweeping “reciprocal tariff” plan that would match the import duties other countries impose on American goods. The newly announced Fair and Reciprocal Tariffs initiative directs U.S. officials to identify and raise tariffs country-by-country, aiming to level the playing field​.

The policy – which could take effect as early as this April – marks a sharp escalation in Trump’s America First trade agenda​. Global trading partners have reacted with alarm, warning of retaliatory measures and higher economic risks as a new trade war looms on the horizon​/

The Details

• Trump’s Trade Review & Tariff Plan:

  • Signed a memorandum on Feb. 13 directing Commerce & USTR to review trade barriers.

  • No specific countries/products named, but key examples cited:

    • Brazil: Tariffs on ethanol (hurts U.S. biofuel exporters).

    • India: 100% tariffs on high-end motorcycles (Harley-Davidson impacted).

    • EU: Bans on American shellfish (hits U.S. seafood producers).

    • Europe: 10% duty on auto imports vs. U.S. 2.5% rate.

    • France & Canada: Digital service taxes (target U.S. tech giants).

  • Also reviewing VATs, foreign subsidies, and regulatory barriers.

• Rationale & Trade Deficit Concerns:

  • Trump argues unfair trade “hollowed out” U.S. industry.

  • U.S. goods trade deficit hit ~$1.2 trillion in 2024.

  • Admin sees this as justification for aggressive tariffs.

• Timeline & Expected Actions:

  • By April 1: “Fair and Reciprocal Plan” of country-specific tariffs due.

  • New tariffs could roll out as early as April unless deals are struck.

• Global Response & Backlash:

  • EU: Called move “unjustified,” vowed firm & immediate retaliation.

    • Urgent EU trade minister meeting, Germany urges negotiation.

    • EC President von der Leyen warns of countermeasures.

  • China: Condemned move as “unilateralism & protectionism.”

    • Already hit by 10% tariff on all Chinese imports.

    • Preparing WTO action & potential further retaliation.

  • Canada: Criticized revived 25% steel & 10% aluminum tariffs.

    • PM Trudeau vows retaliation if necessary.

  • Japan, South Korea, UK: Also targeted due to trade surpluses.

    • Scrambling for exemptions or side deals.

• Shift in U.S. Trade Policy:

  • Moves away from WTO most-favored-nation (MFN) principle.

  • Implements a bilateral “tariff-for-tariff” approach.

  • Admin argues it’s using U.S. market power to force open foreign markets.

  • Car tariffs: EU could avoid new U.S. duties if it drops 10% rate to U.S. 2.5%.

  • Future negotiations likely country-by-country, not one-size-fits-all.

Why It Matters

• Inflation & Economic Risks:

  • Tariffs act as a tax on imports, raising consumer & industrial prices.

  • U.S. inflation already rising: January CPI hit highest increase in 18+ months.

  • More tariffs could force Fed to stay hawkish, limiting rate cut options.

  • Moody’s Analytics: Predicts higher inflation + U.S. job losses.

• Market & Investor Reaction:

  • S&P 500 initially shrugged off news, closing +1% on announcement day.

  • Uncertainty remains: Bank of America warns of stock price fragility.

  • Sectors at risk:

    • Autos, electronics, retail: Face higher supply chain costs.

    • Exporters (farmers, aircraft, industrials): Could suffer from retaliation.

  • Potential Winners:

    • U.S. steel & aluminum producers (25% & 10% tariffs boost domestic pricing power).

    • Small-cap firms, defense, basic materials: Less reliant on imports.

    • Possible negotiated market openings if countries lower barriers.

• Broader Macro & Market Implications:

  • Trade war could pressure Fed policy: Rate cuts may be off the table.

  • Bond yields could rise: Inflation expectations increase.

  • Currency markets may react: Stronger U.S. dollar could weigh on emerging markets & commodities.

• Uncertain Path Ahead:

  • Will key partners compromise or retaliate?

  • Will tariffs roll out piecemeal or all at once?

  • Trade policy now a major wild card for 2025.

FOMC Minutes (Feb 19, 2025) – Fed Signals Patience Amid Inflation Uncertainties

Synopsis

The latest Federal Open Market Committee (FOMC) minutes underscore a cautious Federal Reserve staying on hold after its January meeting. Policymakers see monetary policy as restrictive enough for now and want to see more progress on cooling inflation before considering further rate cuts​.

Discussions revealed heightened uncertainty – from stubborn price pressures to new tariff policies – prompting a “wait-and-see” approach. The Fed also hinted at flexibility with its quantitative tightening (QT) program, noting it may adjust balance sheet runoff if needed to safeguard market liquidity.

The Details

• Interest Rates:

  • Unanimous decision to keep rates unchanged in January after a 25 bps cut in December.

  • Fed officials agree policy is restrictive enough to temper demand and inflation.

  • Further rate cuts are contingent on clear progress toward the 2% inflation target.

• Inflation Outlook:

  • Inflation has eased but remains above the Fed’s target.

  • Core PCE inflation ~2.8% (late 2024), down from over 3% a year earlier.

  • November-December inflation data showed notable progress, but more sustained disinflation is needed.

  • Key risk: New tariffs and policy changes could push inflation higher.

  • Business contacts report tariffs likely to increase consumer prices.

• Economic Growth & Employment:

  • Economy expanding at a moderate pace, labor market cooling gradually.

  • Unemployment: ~4.0% as of January 2025, considered "full employment."

  • Wage growth stabilizing, risks viewed as "roughly balanced."

  • Some hawkish members warn inflation risks may still outweigh employment risks.

  • Fed projections foresee 2% GDP growth in 2025 with a soft landing.

Quantitative Tightening (QT) & Balance Sheet

• Balance Sheet Policy:

  • Fed continues reducing bond holdings, tightening financial conditions.

  • Some officials suggest pausing/slowing QT to avoid liquidity strains.

  • Concern over U.S. debt ceiling resolution affecting bank reserves.

  • At current QT pace, reserves might fall below desired levels as Treasury ramps up issuance.

  • Market expectations now suggest QT will end by mid-2025.

  • Future balance sheet adjustments could align Fed holdings with Treasury issuance mix.

  • The Fed aims to avoid destabilizing funding markets by managing liquidity carefully.

Market Reactions

• Stocks & Bonds:

  • Initial muted response; S&P 500 & Nasdaq closed flat to slightly positive.

  • Treasury yields dipped, bond prices rallied as QT adjustment hints took focus.

  • Yield curve steepened: short-term yields fell more than long-term.

• Dollar & Commodities:

  • USD initially firmed but softened post-release as yields declined.

  • Oil prices settled positive but well off intraday highs.

  • Gold remained near highs amid Fed’s cautious stance and inflation concerns.

  • Cryptocurrencies showed little reaction, reflecting a neutral policy outlook.

Forward Guidance & Policy Path

• No Rush to Ease:

  • Fed reinforces a higher-for-longer stance on interest rates.

  • No preset course for rate cuts; any easing will be data-dependent.

  • Fed sees only two small rate cuts in 2025, fewer than previously projected.

• Conditional Pivot:

  • Rate cuts could come if economic activity weakens or inflation falls faster than expected.

  • Some officials note the current rate may not be far above neutral, limiting further hikes.

  • Fed’s next move is likely between holding steady or cutting, depending on data.

Why It Matters

• Impact on Traders & Investors:

  • Fed’s stance keeps short-term yields high, sustaining an inverted yield curve.

  • QT pause hints bullish for bonds, reducing supply pressure.

  • Stocks benefit from soft-landing potential, but high rates cap valuations.

  • Market volatility remains tied to inflation & Fed pivot timing.

• Macro Trends – Inflation & Debt:

  • Inflation may remain above 2% through 2027.

  • Treasury issuance & Fed’s liquidity stance key for financial stability.

  • Strong USD may pressure emerging markets & commodities.

• Strategy & Positioning:

  • Cash & short-duration bonds attractive with high short-term rates.

  • Adding duration before rate cuts could be profitable.

  • Value stocks, financials, and defensive sectors may outperform.

  • Fed’s caution extends the economic cycle but requires strategic patience.

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The BRRR is meant for informational purposes only. It is not investment advice. Please consult with your investment, tax, or legal advisor before making any investment decisions.