US  tariffs: not a significant threat to Fed’s inflation mandate - Wells Fargo

Analysts from Wells Fargo, do not foresee the steel and aluminum tariffs as something that will present a significant threat to the Fed’s inflation mandate.

Key Quotes: 

“President Trump has announced that he intends to levy tariffs of 25 percent and 10 percent, respectively, on imports of steel and aluminum, but there is considerable uncertainty regarding the effects of these proposed tariffs on the U.S. economy. For starters, all of the details are not yet finalized. If the tariffs are ultimately implemented as envisioned, the industries that use a significant amount of steel and aluminum would clearly be most affected and prices of their products could rise markedly.”

“The ultimate pass-through to consumer price inflation tends to be small after steel and aluminum get incorporated into finished products.”

“Even in the industries that use steel and aluminum most intensively, those metals account for less than 40 percent of costs.”

“With headline CPI currently expected to run only a touch above 2 percent, we do not foresee the steel and aluminum tariffs as something that will present a significant threat to the Fed’s inflation mandate. That could change, however, if tariff or other trade barriers (such as quotas) become more widespread. While the Fed may be willing to tolerate inflation a little above its 2 percent target for a time so inflation can “catch up” after a prolonged shortfall, an all-out trade war could spark more threatening inflation. That would put the Fed in a difficult position as inflation would be rising above the Fed’s comfort zone while real GDP growth would likely be slowing.”

“In the event that the White House applies 25 percent tariffs on steel and 10 percent tariffs on
aluminum, without an ensuing trade war, we expect minimal increases to consumer price inflation. Steel and aluminum represent only about 4 percent of U.S. imports, which limits the effect on overall inflation even if producers pass on higher input costs to consumers. We suspect that CPI inflation would rise by a bit less than 0.2 percentage points as a result of the currently-proposed tariffs. This would likely not be enough to change the Fed’s path of rate hikes. However, there remains considerable uncertainty.”