The Trump Show and monetary policies

The Trump Show has only just begun and is already living up to its billing. Each day brings a new round of announcements, often contradicting those made the day before. Surprise effect: five stars; coherence: zero. The only tangible effect to date has been a surge in economic uncertainty. This is not usually what economic agents want to make their spending decisions, nor central bankers to set their monetary policy. The Fed has concluded that the best solution is to change nothing until the dust settles. This could last for several quarters. In the US, where unemployment is very low and inflation too high, an increase in tariffs raises concerns about a fresh spike in price pressures. The new Treasury Secretary is well aware this is not the ideal backdrop to enact new tax cuts without scaring the bond market. In Europe, where growth is non-existent and the job market is showing signs of weakness, the predominant effect of a tariff war could well be disinflationary by slowing the export driver. To prevent inflation from falling persistently below its target, the ECB needs to cut policy rates much lower, which is expected to support a still stuttering bank credit recovery.