We received news today that the US and China are rolling back their reciprocal tariffs for 90 days. In doing so, each side is cutting the bulk of their existing tariffs from 125% to 10%.
The stock market indexes jumped in response. But one thing no one seems to be discussing is what the Fed’s response will be to the newly imposed tariffs.
What they do to counter these inflationary pressures will have a long and possibly undesired effect on most small and mid-sized businesses. Let’s remember that the Federal Reserve Board has two major controls they use to promote our economy.
The first is the Fed Funds Rate, or the interest rates they charge when lending money to banks which is currently between 4.25% and 4.5%. The banks then take this money and lend it to us, adding percentage points on top of what the money costs them to cover their risks in lending and profits.
The second thing the Fed does is to control the supply of money they make available inside the banking system. The Fed can decrease the monetary supply which will generally slow down our economy and combat inflation, making it harder for banks to get money to lend.
The question becomes what is The Fed supposed to do now? They find themselves between a proverbial rock and a hard place.
Are they fighting a potential Recession or is the possibility of Stagflation their priority? In order to explain, let’s provide a couple of definitions.
A Recession is when we have a period of significant decline in economic activity defined as a minimum of two quarters of negative Gross Domestic Product Growth. These periods have higher unemployment rates, lower consumer spending, lower business investment, and a declining stock market.
If you’ll remember, our economy had a negative GDP of -0.3% last quarter.
Stagflation, which happened back in the 70’s, is a period of high unemployment, high inflation, and stagnant growth percentage in our economy. In many ways, its an economy stuck in the mud. This could easily happen with these 10% across the board tariffs.
The problem is that policy solutions for Stagflation normally make it worse.
If they raise the interest rates and constrict monetary supply to combat inflation, it increases the unemployment rate and slows down the economy. If they lower the interest rate and open up the flow of money, it lowers the unemployment rate and speeds up the economy while increasing the rate of inflation.
Let me leave you with this…
These tariffs are now a simple fact of life for every entrepreneur. Our recent deal with the UK and the 90 day pause in tariffs with China should show us one thing.
That a 10% across the board tariff is our new reality no matter what other deals are cut. The resulting possibilities of a Recession or the never ending nightmare of Stagflation are real possibilities.
It won’t take much more that the 10% tariffs to make either of these occur. The question becomes what can any of us do in response?
Chairman Powell’s Federal Reserve has proven time and time again, that they won’t do anything until they’re absolutely certain. They were very slow to act when inflation reared it’s ugly head back at the beginning of 2020.
But once the Fed knew where things were going, they acted faster than any other Federal Reserve Board has acted in history to raise interest rates and constrict the supply of money. That should tell all of us that they aren’t going to do anything else about interest rates until they have a clear course of action.
As such, interest rates probably aren’t going to move much in the short term, but after that is anyone’s guess. The major problem we all face is uncertainty.
Are things going to get better, worse, or will we end up in the endless holding pattern of Stagflation? Once you take the politics out of the question, there are no clear answers, but one thing is certain.
It’s obviously a time to be ultra-conservative in the management of our businesses.
Horde your cash like a Viking King. If there’s any fat in your organization, cut it now. And don’t be in a hurry to begin any new projects. You don’t want to be out on a limb if the music stops.
Just like The Fed, there just isn’t much else we can do until we see where things are headed.
And before my friends on the far right or left start writing me hate emails, please realize that this isn’t a political statement. I can’t do anything about the politics or operating environment we all find ourselves in.
But I can help my clients, which is the only thing that my organization has ever been about.
We’re all going to get through this. Let’s get through it together.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,
Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
773-267-7500
888-310-0300
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