Schroders: Tariffs lead to intensified inflation and slowed growth in the U.S., with four rate cuts possible by the end of 2026

According to the Zhitong Finance APP, Johanna Kyrklund, Chief Investment Officer of Schroders Investment Group, and Senior Economist George Brown pointed out that U.S. President Trump plans to raise tariffs on U.S. imported goods to over 25%, leading to significant price increases and suppressing economic growth. The stagflation impact of tariffs (declining economic growth and rising prices) has put the U.S. Federal Reserve in a "dilemma, caught in a bind." In the short term, the path of least resistance is inertia, as the economic impact is highly uncertain. Looking further ahead, the rising risk of economic recession indeed represents that the Federal Open Market Committee may achieve more than the four rate cuts currently indicated in the "dot plot" before the end of 2026.

The new tariffs are more punitive than expected, as the White House not only imposes equivalent tariffs on other countries for U.S. export goods but also targets non-tariff barriers. The proposal will raise the effective tariff rate in the U.S. to 25.3%, resulting in a 2% increase in U.S. prices and nearly a 1% reduction in economic growth. These estimates do not take into account potential retaliatory measures from other countries.

These tariffs are set based on the trade deficit the U.S. has with its trading partners, using unconventional methods. Trump claims this is the "actual" tariff each country imposes on U.S. export products. For countries with tariffs exceeding 10%, the U.S. will impose an equivalent tariff of half that amount. Except for Canada and Mexico, the U.S. will impose a 10% baseline tariff on all other countries.

It is estimated that actions taken by the U.S. government to date will raise the effective tariff rate in the U.S. by another 17.6 percentage points to 25.3%. Before accounting for any retaliatory measures, this will lead to a roughly 2% increase in U.S. prices and an approximately 0.9% hit to economic growth. In contrast, similar retaliatory measures would only increase the effective tariff rate by an additional 1.3 percentage points, with a negligible impact on the economy.

The impact of equivalent tariffs on the economy varies significantly outside the U.S. Canada and Mexico will breathe a sigh of relief, as over 2.5% of their GDP comes from U.S. demand for their manufactured goods. The European Union and Japan may find themselves at an intermediate level, facing an impact of about 0.3% to 0.4% of GDP.

The outcome depends on how countries respond. While the White House has stated that equivalent tariffs can be reduced through negotiations, several countries have already indicated they will take retaliatory measures. Therefore, the risk seems to lean towards further increases in tariffs. For example, if the U.S. government implements comprehensive equivalent tariffs, the effective tariff rate in the U.S. will rise to 35.6%.

For other central banks, the combination of retaliatory measures taken by their governments and fiscal support measures will complicate their work. Overall, it is expected that the Bank of England and the European Central Bank will mitigate the risk of economic downturn through further rate cuts, while the Bank of Japan may not be able to raise rates further by 2025.

Johanna Kyrklund stated that Trump's opening remarks indicate that U.S. tariffs will be higher than Schroders' expectations, leading Schroders to downgrade its economic growth forecast. **This has resulted in Schroders reducing equity investments and believing that government bonds have value in hedging against recession risks in this economic cycle. Schroders continues to be optimistic about gold, as it can benefit from weaker economic growth and the structural risks posed by rising debt levels **

Looking ahead, the reactions of other countries around the world are crucial. The countries on the list must decide whether to retaliate and escalate the trade conflict or consider reducing the trade imbalance with the United States. How long this takes is also important for the investment market. But it is also necessary to try to identify some positive factors. On the physical chart, the framework outlined by Trump is very clear. People may question this approach—comparing each country's trade deficit with the United States—but by applying the principle of imposing a 50% tax rate, they have established a clear starting point for negotiations. This may feel like the next game of snakes and ladders, but at least people are beginning to understand the rules of the game, which provides a basis for pricing these risks in the investment market