Mindy Gudmundson, Institutional Portfolio Manager on the BlueBay U.S. Fixed Income team, discusses how policy uncertainty has affected the consumer and left the Fed with a cautious outlook.
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Hello and welcome back to The Weekly Fix. My name is Mindy Gudmundson, Institutional Portfolio Manager with RBC’s BlueBay US Fixed Income team.
This week is more of the same in the sense that nothing stays the same for very long these days. Central to some of the ever-changing conditions we’re seeing is the ambiguity around President Donald Trump's ongoing tariff threats, which have introduced significant economic uncertainties, impacting consumer sentiment, spending behaviors, and influencing the Federal Reserve’s (Fed) considerations regarding interest rate policies.
The announcement and implementation of broad tariffs have led to increased consumer prices, contributing to a subsequent decline in consumer sentiment. Earlier this month, the University of Michigan's index of consumer sentiment experienced a sharp 10.5% monthly drop and a 27.1% year-over-year decline, reflecting heightened public anxiety over potential economic repercussions.
This sentiment downturn has thus translated into cautious consumer spending. In February, retail sales saw a modest 0.2% increase, following a 1.2% decline in January. While certain sectors like grocery and online retail experienced gains, categories such as auto dealers and electronics retailers faced declines, indicative of consumers' reluctance to spend amid economic uncertainties.
The Fed is closely monitoring the economic effects of the administration's tariff policies. At its January 2025 meeting, the Fed decided to keep the benchmark federal funds rate unchanged at 4.25%–4.50%. Recall that this decision marked a pause after three consecutive rate cuts in 2024, with officials expressing concerns that tariffs could lead to higher inflation, complicating efforts to achieve the Fed's 2% inflation target.
Just last week, the Fed adjusted its economic projections, lowering the U.S. growth forecast to 1.7% for the year and raising the inflation outlook to 2.7%. Fed Chair Jerome Powell highlighted that tariffs contribute to slower growth and elevated inflation, urging a cautious approach amid ongoing economic uncertainties. Rates were once again left unchanged.
In summary, President Trump's tariff threats have introduced significant economic uncertainties, dampening consumer sentiment and spending, while prompting the FOMC to adopt a more cautious stance on interest rate decisions due to inflationary concerns.
While we think a US recession remains unlikely in the near term, a period of slower growth is seeming probable at this point. This week’s data releases – including GDP, inflation readings, jobless claims and mortgage applications - should give greater insight into the trajectory of the US economy.
Lastly, we’ll be keeping a close eye on the proposed changes to a variety of government agencies and spending just now working their way through the system. These include proposed changes to US AID, the National Institute of Health, the SEC, Department of Education and the Housing and Urban Development Department. The administration also has designs on privatizing Fannie Mae and Freddie Mac, a move that could affect the mortgage-backed securities market, mortgage rates, and have broader impacts on the US housing market in general. In short, there is plenty of activity to pay attention to these days, and we’ll be monitoring political and economic developments as they unfold.
We thank you for joining us today and hope you have a great week!
Key points
Significant economic uncertainties are impacting:
Consumer sentiment
Spending behaviors
The Federal Reserve’s considerations regarding interest rate policies.
Public and market anxiety is heightened.
In our judgement, a US recession remains unlikely in the near term, but a period of slower growth seems probable.
