MNI INTERVIEW:Tariffs Freeze Fed, Court Global Recession-Fatas

U.S. tariffs will send an inflationary impulse around the globe even as it depresses growth and raises the risk of recession, with the Federal Reserve likely to be prevented from further lowering interest rates and the reserve currency status of the dollar now questionable, INSEAD professor Antonio Fatas told MNI.

“You can have some economies where the recession effect is so big that inflation doesn't go up at all. A big recession will pull down inflation,” said Singapore-based Fatas, who has advised the Fed Board of Governors and consulted for the IMF, OECD, World Bank, and the UK government.

“Sorry, no one is escaping this.”

The tariffs are big enough to stall the global economy, with most countries likely to retaliate, he said.

“These are tariffs which are very high, they're going to disrupt trade, companies. They're going to lead to retaliation by the other countries,” he said. “This is going to be a serious shock to global growth, not just U.S. growth, and to inflation, no doubt about it.”

Some Fed officials have already pointed to sticky trend inflation as a reason to hold borrowing costs, and Fatas said the best case scenario now would be for inflation to remain elevated rather than getting worse. (See: MNI POLICY: Fed Forced Into Hawkish Stance Despite Growth Risk)

“Growth might slow down, will slow down. Then the central bank is going to be looking at an inflation rate which is either going up or stubborn,” he said. “Even if it doesn't go up dramatically, but at least it's stubborn, it means interest rates cannot go down. And because interest rates cannot go down, you cannot help growth.” 

Nor will tariffs produce the promised benefits of revitalizing America's manufacturing base while keeping consumer prices in check, said Fatas, adding that they will instead harm the U.S. reputation as a rules-based economy that can back up its reserve currency status.

“This is going to cause pain in the short term. And when you wake up from that pain, whenever we get out of whatever crisis we have, we'll be back to where we started. There's nothing good coming out of these tariffs.”

NEW COALITIONS

President Donald Trump’s tariff rates “make no sense” and appear to turn trade balances into a corporate calculation of business profits, he said. Singapore got off lightly even though the U.S. under normal calculations could have found it to be a major trade offender, he said, pointing also to other anomalies. “Brazil has massive tariffs, massive tariffs on anyone and is at the bottom of this table.”

The instability will encourage more odd coalitions like the one formed recently between longtime rivals Japan, China and South Korea, he said. That could also re-unite some post Brexit ties between the UK and EU, he said, and Canada may also seek to join that group. “You are going to see these coalitions, which might not be natural, but this is about power and who yells the most so people will get together to yell as hard as the U.S.” (See MNI: U.S. Policies Will Push EU, China Closer - Senior Advisor)

Fatas is giving up his view the U.S. dollar will remain the global reserve currency in the foreseeable future. “In Singapore, in Europe, in Canada, I'm going to be thinking to myself, can I trust the U.S. dollar? Can I trust the U.S. central bank as sort of the central bank of the world? And the answer is, No, I don't. I don't anymore, because who knows what they're going to do to me.”