Tracking Tariffs with Libby Cantrill & Tiffany Wilding

Stay tuned after the conclusion of the podcast for additional important information.

GREG HALL: Hi, everybody. Welcome to another edition of Accrued Interest, PIMCO’s podcast dedicated to serving financial advisors and their clients.

My name is Greg Hall. I head wealth management for PIMCO here in the United States, and I'll be your host for today's show.

Today's is a special episode. We weren't intending to record one this week, but we felt with all of the volatility in markets surrounding the president's tariffs announcement last week, we ought to bring you some of our freshest thoughts on the implications of the tariff policy, on the recent market movements and what we can expect in the months ahead.

I should mention that we're recording this on Tuesday, April the 8th. And those of you, like me who have been following markets fairly closely, know that things are moving quickly. And so I just want to give you that date. It's the afternoon, just in case anything has changed radically in the hours since, you'll be able to, reference the comments here and understand the context in which they're being given.

I was incredibly fortunate for this conversation to have with me, two of the brightest and frankly, busiest people at PIMCO these days, Libby Cantrill, our head of public policy, and Tiffany Wilding, who is our senior U.S. economist here at PIMCO. Both, brilliant in in their analysis and observation of what goes on in markets, and a lot of fun, actually, to sit and talk to and go through all the different probabilities and potentialities of what we all face today.

I hope you enjoy the conversation. I hope you can, discuss some of the implications with your clients, and that we can all learn from, from the points that they make and that it'll help guide decisions in these very uncertain times. Thanks. And enjoy listening.

Today, I am joined by two of our foremost minds at PIMCO. I've got Libby Cantrill, who is returning to the podcast for her second… It's very exciting. 

LIBBY CANTRILL: So exciting! I am very excited to be here.

GREG HALL: Libby is our head of public policy at PIMCO. This is her second appearance on the podcast. She was here with us a week after the election in November, and did a fabulous job. We expect no less of her this time around, and then for her first appearance on the podcast, Tiffany Wilding, senior economist here at PIMCO from our offices in Newport Beach. Tiffany's been a pretty tough person to get ahold of these last few days, given everything that's going on in the world and certainly you know, with the tariff announcements. So, Tiffany, thanks for making time for us. Thanks for making time for our clients.

TIFFANY WILDING: Yeah, well, thanks for having me! I'm sure that my schedule is just as tough as Libby, so I'm glad we could all get together and do this.

GREG HALL: Let's just get right into it, because I think, you know, every financial advisor, you know, I would say every financial advisor in the country right now is laser focused on this topic  for their own planning purposes and trying to come up with, you know, their thoughts about investment strategy at this point. But also because their clients are reacting to the news they're seeing, the market movements, and clearly are unsettled by what's going on primarily in the equity markets. And have really tough questions to answer about what's going on. And there's not a lot of clarity out there.

As we've said at PIMCO earlier in the year, uncertainty is certain and we seem to be living that out. So, Tiffany let me kick things off with you. And just the most basic question, but in a macro economist's words, what has happened and how maybe has it differed from your or the market's expectations?

TIFFANY WILDING: Yeah. So April 2nd we had an announcement from the Trump administration. You know, and I would just say putting the punch line first is the announcement on tariffs were significantly larger. And I think broader in scope than expectations, which had been ratcheted up to large expectations ahead of it. You know, and just what does that mean specifically?

Well, the President announced a comprehensive reciprocal tariff plan, and it was aimed, at least they argued, aimed at reducing the trade balance that the United States runs, specifically the trade deficit with other countries. And the administration has been very clear and I think very consistent that they view the US trade deficit as symptomatic of unfair practices of other trading partners  you know, that the US cannot just cannot compete with.

So, you know, what did the plan consist of? Well, there was two main components. The first was a universal basic tariff of around 10%. You know, the administer Trump himself had talked a lot about that on the campaign trail. But I think what was maybe even more surprising was that on top of that, we also got country specific tariffs.

I think it was 57 countries where the US runs trade deficits. And those tariffs were significantly larger. You know, and kind of a function of the US trade deficit with that country. So, you know, folks like China, for example, saw a 34% increase that was announced on top of the 20 percentage point increase that we've seen since February and February and March to bring their tariff rate close to 60%, I think maybe even a little bit above.

Other countries also saw pretty significant increases like Europe 20 percentage points higher. Japan, I think was 24, Vietnam, 46, et cetera. So, you know, pretty extensive tariff increases across various countries. There were two broad exceptions, which, you know, I would just highlight. 'cause I think they're interesting. You know, Mexico and Canada were excluded. We have separately put tariffs on non USMCA goods, though of 25% for those countries, but they were excluded from this.

And then the second broad exception was just on various products including steel, aluminum, passenger vehicles, pharmaceuticals, chips, et cetera. You know, and these are products that we expect tariffs to come on at some point relatively soon. And that's why they were carved out of this. So we, you know, we don't think there's really a reprieve there other than, you know, maybe for a few months or so until they can get these on.

GREG HALL: So there's three interesting things in that I picked one. One was, it sounded to me like you said, the formula for determining terrorists was actually based on the trade deficit, the actual trade deficit we have with the country. So there, it seems to me, and maybe I'm interpreting you incorrectly, that we looked at the actual effect of trading with them. And if we were in deficit, we assumed it was because of tariffs or exclusionary practices. And so we calculated our reciprocal tariff based on our success or lack of success trading with that country. Is that about right?

TIFFANY WILDING: Yes. Yeah, I mean, that, that basically sums it up. You know, again, the idea here, that the administration has, is that a deficit that the US, you know, the deficits that the US has run with other countries because they've, you know, been so systemic over the last several decades, is reflective of the level of sort of like an unfair playing field or unfair advantage that that country has, and so basically…

GREG HALL: So if there's a deficit, it's just evidence that they're behaving unfairly.

TIFFANY WILDING: Exactly! And so then what they're trying to do is they're trying to calculate how much do we have to increase prices of goods coming from those that country to basically disincentivize US consumers from purchasing those things, and reducing that deficit. You know? And you know, the other argument, obviously, that the administration has used is, you know, China needs us more than we need them. And as a result of that you know, China is effectively going to pay, they're gonna reduce their prices, so they continue to export to the US and they're gonna effectively pay this additional tax. So either way, the administration has effectively argued that, that the US will win. 

GREG HALL: Right, right. The other two things that you mentioned, I'll just combine 'em into one, the, we've got the product based tariffs that are TBD and we have the exclusions of Mexico and Canada. And is, are those in your mind, and this might be a question for Libby as well, are those being set up deliberately as negotiating pieces or in the case of Mexico and Canada as evidence of the benefits of coming to the table with us early? Or is that, am I reading too much into that?

TIFFANY WILDING: I mean, I could give my sense of that. I think the key issues, boiling it down of the administration, I would argue are twofold. You know, one is to reduce unfair trade practices across economies. But the other one is to basically at this point, limit China's access to the US economy. You know, because we've been negotiating with them for the course of, you know, again, decades. Obviously the Trump administration, you know, started negotiating with them in a more tough way in the first administration.

But at this point, they wanna limit, you know, China's access to the US market, and so putting a 25% tariff on non USMCA compliant goods coming from Mexico and Canada tries to limit China's ability to invest in those economies. And I would argue they're trying to do this elsewhere as well. Like with Vietnam, with other Southeast Asian countries, it reduces China's ability to invest in those countries or reroute trade through those countries and get around the high US tariffs on China. So I would argue, you know, this may be less of a negotiating tool rather than just to, again, limit the ability of China to access the US market.

LIBBY CANTRILL: Yeah. But maybe I can just jump in. I think the lack though, of more punitive measures on Canada and Mexico, which is what we saw, right? I mean, so we had already seen this sort of 25% tariff on all goods from China and Mexico, except for energy products, which was 10%. And then President Trump kind of walked that back a little bit, and did this carve out for non-USMCA goods? I think by our calculation, that's about half of the goods. Although we think that…

GREG HALL: One of you, actually, just before we go on, we've used an acronym, which we try to, limit USMCA, just…

LIBBY CANTRILL: So NAFTA 2.0, which is the trade agreement of course, that we have among Canada and Mexico and the United States, that President Trump, ironically enough, led the negotiation and ratified under his first term. I think there were some unintended consequences though, of that trade agreement that they're trying now to solve. And that's what somewhat this sort of this 25% tariff tries to address.

However, I think the fact that they were not, they were sort of carved out of these reciprocal tariffs is an acknowledgement that one especially with, for members of Congress, and we'll talk about this in just a bit that, you know, tariffing, Mexico and Canada is a bit of a bridge too far, I think politically and two, that the, those tariffs were put on because of fentanyl and border, and actually they, those could be decreasing.

That's they President Trump in the liberation day executive order actually mentioned a possible decline to 12% for Canada and Mexico. So I would just sort of sum this up from a high level as like better news for Mexico and Canada. And then just the last thing on the products, not to be kind of too pedantic here, but there, we actually already have tariffs on aluminum, steel and autos. I think what Tiffany was sort of referring to is forthcoming tariffs on chips and semiconductors.

GREG HALL: Right! Right, right. Alright. Let's finish with kind of the economic impact, and then we'll come back 'cause there's so much to explore, I think politically here, but Tiffany how did these tariffs kind of reverberate throughout the economy? Let just talk through, you know, the basic impact on everyday businesses in the US. What are we concerned about in terms of, you know, the impact on overall growth and inflation? Just give us a sense of how you, any heuristics or formulas you use to think about that.

TIFFANY WILDING: Yeah. Well, maybe let me just start off by saying that, you know, I mentioned before that the key, I think the key assumption that the administration has in all of this. I'll talk about the US and China just because it's like kind of the most extreme case here, but that the US has leverage because you know, not to use too much jargon, but, you know, China needs the US more than the US needs China because the things that China is supplying basically can only go to the US market.

It can't go anywhere else. And on the other side of that, the US has a lot of capacity to increase domestic production and substitute if you had higher prices. That is the key assumption that the administration has here. So, in other words, Chinese supply is more inelastic to use jargon, and US demand is more elastic.

And as a result of that, China will pay the tariff. You know, and I would actually argue the reality is much different. And the reason is because you know, I think you can think about China as a monopolist in a lot of ways. And the reason why I would characterize 'em that way is because they have through, again, domestic implicit domestic subsidies to their own manufacturing sector.

They've really depressed wages and labor costs, and China, the US just can't compete with that. And as a result, we've had had this hollowing out of the middle class in the United States, we have had manufacturing that's been  less and less of a share of the overall economy over decades. Because China's basically driven them out of business, right? And they become a monopoly power in a lot of areas as a result of that undercutting.

And so if you believe that, you know, then it suggests that higher prices will result as because of these tariffs that the US can't actually just build up manufacturing overnight again and substitute, you know, and buy these goods from a US factory. We need to, that will take time in order to do that. And in the meantime, you know, US customers, US consumers of these products from China, you know, will be paying higher prices. You know, and I think that is the key issue here, at least over the short run. You know, and so that basically just means that  you know, you can kind of do some back of the envelope calculations. We use just like a rule of thumb that for every percentage point increase in the average effective tariff rate on the stuff that the US imports, so taxes on imports, you have growth that declines by about a 10th of a percentage point of that.

And you have inflation that accelerates, at least in the near term a similar amount. So in other words, the 20% increase in the average effective tariff rate that has resulted from the accumulation of these policies, you know, plus the additional products that we think will come on that suggests we could have a pretty big growth headwind. You could see growth in the US going from 2% to grinding to a halt, maybe even slightly contractionary. And even at the same time, see inflation, at least core goods inflation, that's accelerating higher as you're getting that price level adjustment. And we think even going back above 4% is certainly possible.

GREG HALL: That's, sorry to break into there. One, I just wanted to say when, for our listeners, when Tiffany says rule of thumb, she usually has about a 50 page econometric analysis behind it. So for her standards for a rule of thumb are, maybe a little bit higher than the rest of ours. And then secondly you know, I just, I think that's just sort of an incredibly, you know, interesting implication. 'cause we've seen markets over the last couple of days bouncing back and forth between, you know, which, which side is it the inflationary side or the growth side, that is the dominant sort of fear factor for lack of a, I gotta invoke Joe Rogan on a podcast, I guess in the markets. And so do you, like, where does that bring your kind of estimates for 25, Tiffany?

TIFFANY WILDING: Yeah, I mean, so I think uncertainty itself, I mean, you bring up a good point. So I, you know, in the rule of thumb that I was talking about, this was more like the direct effects of just higher taxes. You could think of these tariffs as literally just a very large consumption tax. One of the largest in history, by the way, two percentage points of GDP that was unilaterally you know, implemented by a president of one of the largest tax hikes ever in the history of our economy.

That was kind of a direct effect discussion. But you're right, there's this other issue out here, which is that irrespective of what's actually implemented, uncertainty has just increased quite a bit. And you've had, you know, volatility and announcements up until now. And the reason why that impacts economic activity is because there is zero cost to waiting.

And as a result of that, in highly uncertain times, you know, companies will delay hiring and investment decisions  in order to, you know, to try to gain more confidence and to try to gain more certainty. And so that we think is also, you know, a big, a major impact here. And it's impacting not only the US but the global economy, you know, and certainly economies that are also you know, more trade sensitive.

I don't know if that's where you were going with that, but…

GREG HALL: No, no, no. Yeah. No, no. It's, I was, just thinking about the notion that there's no cost to waiting. 'cause there's obviously, there's no direct cost, but I think it's a really interesting point that you're making. I think investors are feeling it now, right? You're seeking out safe havens in cash and waiting out the volatility. I think advisors probably see it in their practices. You, if you're thinking about hiring somebody to come on and help your clients with tax planning or other, you know, value added services.

I think there's a question about sort of the overall state of the world. You put off that decision. Certainly you can imagine it, right? In a manufacturing context or a business context. You know, should I order more inventory right now before prices go up, or should I put that off because I don't know what demand is gonna be, and the dampening effect that that can have on overall economic activity, I would imagine is very hard to calculate.

But we're probably also seeing some of it even before, you know, the official data comes through in coming months. And you know, in thinking about that, I guess it brings me to the natural question of how long this is going to go on, right?

How long until we have some clarity or some certainty about, maybe we don't like the ultimate answer, but at least we know what it is, right? Which I think probably a lot of people are in that situation. What for, whatever your opinion is of what should happen here, there may be a compromise at some point, whichever side of that compromise you're on, there's value to having certainty, value to the economy, value to all of us making decisions. So let's transfer over to Libby here for a second.

Because, because Libby's powers of prediction on this are actually, I think, you know, reasonably well documented  when Libby was with us in November she made it very clear then as she had previously to the podcast and subsequently, that this is an ideological value of the Trump administration. It's been an ideological belief of the President since, well, before he dreamed of becoming President.

Well, I don't know when he first dreamed of becoming President, but certainly well before he was in the running. So this maybe in its magnitude was a little surprising, but certainly not in the fact that we had a liberation day last week. So Libby, one just give you credit where it was due. Thank you for guiding us and our clients. What do you think about this topic of certainty or clarity and what's the path that you foresee over the next few months?

LIBBY CANTRILL: Well, first of all, thanks for the credit. I mean, I do, I, you know, oh, I'll take it. But, we, I mean, we, as Tiffany said, I think even we, who had been maybe a little bit more hawkish on his trade views just going into the year and were sort of positioned more defensively, I think because of it  we're surprised by how liberated in his view we were on liberation day. I think, so a couple of things.

One is just to take, to use a framework that hopefully is helpful for clients, is that he does believe this, this is his worldview. He has thought, as Tiffany said, that the goods trade deficit was a symptom of much broader issues, not only around tariffs, but around industrial subsidies and FX manipulation and tax policy.

So he really does believe, and it's not just the trade deficit, it's the goods trade deficit. So it does not include services. As that, as a scorecard with the rest of the world, and I don't think we're gonna change his mind on that. So people may agree with him, they may disagree with him. I always say, that's not our role here at PIMCO.

It's from a Washington DC observer perspective. It is to really talk about what is likely to happen, not what should happen. So I think that though, as a framework is quite important because he does believe in this. And unlike Trump 1.0, Trump 2.0, we talked about personnel's policy on the pod last time. Do you like how I just said pod too? I did, I just very casually said that. Do you like that?

GREG HALL: I appreciate the callback it makes me, yeah, it's a wonderful feeling.

LIBBY CANTRILL: But personnel's policy and the personnel under Trump 2.0 has a more consistent worldview on this particular issue than under Trump 1.0. There is absolutely some dissension. But broadly speaking, there's more unanimity around the trade deficit, around the fact that tariffs work and just sort of this general ideology. So I think that is just important when we're thinking about what is likely to happen going forward, is that this is underpinned by a very strong ideology. With that said… 

GREG HALL: There some external voices of late tweeting about their dissatisfaction with the policy. Do you think those have any bearing whatsoever, or,

LIBBY CANTRILL: Yeah, so, I'm gonna get to that. I think so. I'm just winding up. Greg please! This is my second appearance on the pod. I'm very comfortable. I was like, I may have earned it just to have a framework. Okay. So tariff man in that view. But then there's also transaction man, and this is kind of to your point about, you know, is there going to be pressure on President Trump to come to some deals in order to provide some certainty and specifically some relief from a tariff perspective?

Absolutely! Now, do I think that folks who are tweeting at the President are gonna be successful? No, I don't. Do I think political pressure as it relates to members of Congress?

Maybe, but honestly, many folks in the Republican party have President Trump to thank for their jobs. So I think that most of the pushback will continue to be private and not public. And I just don't think it will really move the needle. But can he be swayed by public opinion? Absolutely! And that is what I would look at. I mean, there is a metric and kind of put politics net approval rating.

So your approval rating minus the disapproval rating President Trump, his approval rating is like, okay for this early in an administration. But it's really good when you compare it to what it looked like under Trump 1.0. We know that's the frame that he is using. So I think unless you see a significant decline, and you could absolutely see that. But unless you see that he is going to continue to operate with the assumption that he has a mandate to do this, he ran on this and he told everybody what he was going to do.

And this is what I do think, to his credit, he's just been incredibly ideologically consistent on this and he told everybody what he was gonna do. He told them that he was gonna do the 10% baseline tariffs. Now, I think as this discussion goes, of course, like he did something even kinda more draconian, but I think with the intention of negotiating from there. So yes, there is pressure from outside forces.

I think some of it's more effective than others. I do think there's a political limit to all of this, but I think the direction of travel here is very clear that higher tariffs are here to stay. And anybody who is holding their breath thinking that we're gonna go back to the effective tariff rate of 3.3%, which is where we were when we started the Trump 2.0, I think they need to wait for much longer.

GREG HALL: That effective tariff rate of 3.3%. That's the average tariffs across all imports. And that compares to the 20% number that Tiffany just gave us, which is the ultimate result of what was announced on Liberation day.

LIBBY CANTRILL: Yeah, and I think you could, I mean, we were just going back and forth about the estimates. I think it's a little bit squishy, but you could say that the increases, you know, 20 by 25% if all of these things are layered on and they all stick. And I think that of course is the, so, yeah…

GREG HALL: Six, seven eight times as high basically.

LIBBY CANTRILL: Yeah. And if you talk in that rule of thumb that she, you know, that she just talked about, I mean, that's a pretty big headwind to both growth. And then obviously some pressure to inflation. So I do think that there's a political limit to all of this. I don't think we're gonna see the effective tariff rates sticking around at 20 or 25%. However, again, I do think you're going to see some of this stick, and maybe if you will, you indulge me, I will…

GREG HALL: Do I have any choice in the matter?

LIBBY CANTRILL: I'm not really, I'm just trying to be, I'm just trying to be polite.

GREG HALL: Thank you!

LIBBY CANTRILL: Hoping I get an invite back, but maybe I won't. But I think that the kind of a frame for our clients to use is that the 10% universal tariff is very unlikely to go away. Now, you know, maybe he has some deals with the UK or Australia, that doesn't really matter. So, maybe that 10% declines for those countries, but we have a surplus with Australia, for instance, so it doesn't really matter. But I think that just by and large, that 10% is here to stay.

And then the sectoral tariffs, we were just talking about aluminum, steel, autos, pharma, I think those stick around. And then I think higher tariffs on China stick around. And I think everything else is gonna be subject to a negotiation. Some of those negotiations are gonna be easier, Japan for instance, but some of them are gonna be harder, the EU. So, I just think that the upshot here is a much higher effective tariff rate, more trade policy uncertainty, but probably not as high as what we have right now, if all of these things stay in place.

GREG HALL: Where do you think we should be looking earliest on to? Like, if your thesis is correct, where do you think we'll see deals first? Is it Japan, which has already been in the headlines? South Korea was in the headlines today, those places that we ought to be looking at.

LIBBY CANTRILL: I think Japan easy or Australia very easy. Given, we have a trade surplus UK easy as well. Again, some kind of like inconveniences, some things that are gonna agitate us, but in terms of not being existential or sort of insurmountable India, I think likely. And then Argentina was something that actually the US trade representative today and his testimony to the Senate Finance committee mentioned. So those, I think you will see some sort of deal.

Now, any trade negotiator will tell you that those things do not happen at a day. So maybe some, there are some positive headlines, but actually to secure a deal that has some sort of longevity will take weeks if not months. So again, I think that this, the new frame for clients should be that we are gonna be living with these higher tariffs for a bit. And I think to Tiffany's point, they can actually really start eating and start hurting, you know providing headwinds, eating into growth and what have you. But just even longer term, even after these deals; we will have a higher tariff rate.

GREG HALL: Yeah, and of course, markets could anticipate some of that progress over time, but it, we're gonna be living by the headlines for a little while longer, is what I…

LIBBY CANTRILL: Yeah, but I do think that like, there will be, should be certainty in the fact that we're just gonna have higher tariffs. And so you have to sort of do the analysis and the valuation. Kind of, and I think this is what markets are wanting. They just want some framework for how the Trump administration is thinking about this, and they're just getting different answers from different people.

GREG HALL: Right, right. That makes perfect sense. So Tiffany, as we then think about other, you know institutions that can react to this, the Fed looms large, right? They already had some big decisions to make in 2025. Now the, the stakes have been raised. I'm curious your thoughts on Fed, what framework would they use to evaluate this? And while we don't try to, you know, be too pinpoint precise on unfed movements from an investment perspective, you know, what you think is likely over the course of the year to, to see from them.

TIFFANY WILDING: Yeah. Well, you know, I guess I'll state the obvious. You know, just the economic effects of these policies put the Fed in a really tricky position because, you know, on the one hand you have you know, profits, corporate profits that will get squeezed. You have real domestic incomes, you know, people, the stuff that they can buy with the income that they have that will get squeezed, that will all hurt growth.

But on the other side of this, at least in the near term, you also get this price level adjustment that's gonna happen. And, so you have the potential for, you know, for both sides of the dual mandate, the unemployment side or the full employment side, and the price stability side that's moving in sort of dissimilar directions, opposite directions, you know? And I think, you know, there's a lot of uncertain.

I would just take a step back and just say, we talked a lot about uncertainty, you know, in various dimensions in terms of like what that means for like, how businesses and, and consumers are acting today. But I would just say in terms of the economic adjustment here, like I gave you a very easy back of the envelope calculation. But the bottom line is, is we haven't seen this type of tariff hike since the 1920s and the 1930s, you know, Smoot-Hawley Act, and obviously the US economy today and the global economy is much different than what we had back then in a lot of ways. So I, you know, I did, I would just really underscore here that there's an even a lot of uncertainty around, not only how long would these tariffs remain in place, what they'll look like, what the destination is, but what the actual economic adjustments will be you know, over the course of the next several years as a result.

But I think it's tricky because you know, because of several issues here, you know, the first one is just that we haven't talked at all about this, but there are also immigration policies that are happening at the same time as all of this tariff stuff.

And these immigration policies that the Trump administration is implementing cannot only, they might not only slow labor supply, but they might actually result in a contraction in labor supply because you have immigrants that are losing work permits. You know, as a result of a removal of certain countries from like protected status, Venezuela, we saw that  you know, but other countries that are coming up for that like Ukraine could also lose temporary protected status.

You know, it's also possible, but just from an administrative perspective, the Trump administration just stops issuing these work permits. And so, you have the labor supply that's re declining, that can dampen the effect on the unemployment rate. But then you also have, you know, just the fact that we are coming off of a pandemic period where labor supply was so scarce, that businesses shifted how they you know, how they manage their labor.

And basically what they did is instead of hiring fewer people to work more hours, what they decided to do was hire more people, have more redundancies, but work all of those people fewer hours, so have more temporary work or what have you. I mean, and that gave them greater flexibility. And so as a result of that and all this uncertainty, you know, maybe you want to hedge against a scenario where like all of this goes away, you know, sooner than anybody thinks, right?

And you want to make sure you still have the employees. If that happens, maybe what you do is, you reduce hours, but you keep your employees, you're just working them fewer shifts or fewer hours. And if that's the case, then you also might not get an unemployment rate adjust as big of an unemployment rate adjustment.

So all of this, again, you know, I would just say underscores how problematic this is for the Federal Reserve, because they will have inflation that's possibly accelerating back above 4%, you know, at the same time they have an unemployment rate increase  you know, that maybe might not be as big as, as what they're used to. So I think it does constrain them.

And I think, you know, relative to the first Trump administration, when you had the Fed that was preemptively cutting rates as a result of the elevated uncertainty from, you know, the actions against China, then the Fed might be way much more constrained in their ability to preemptively cut rates.

They might be more delayed; they might have to actually wait to see the unemployment rate rise. You know, and even then, you know,  in the average recession, historically the Fed has cut 500 basis points. They might be cutting much less than that at this point, again, 'cause of the constraints around inflation, at least in the near term, you know, so I think the reaction function to the Fed could be much different here, much less of a release valve than what the markets  you know, have grown accustomed to in the recent past. 

GREG HALL: Tiffany, one of the words that has popped up a lot in advisor conversations and around the media stagflation. And when I think of stagflation, you know, it obviously it hearkens back to the seventies, I think, of, you know, people driving enormous cars to stand in line at gas stations. I think of Steely Dan you know, great cinema of the seventies. But I think there's probably pretty palpable ways that that era is different than the one we are in today. Could you maybe help advisors listening, just, you know, understand that, why that historical comparison might not be perfectly apt?

TIFFANY WILDING: Yeah. I know, I think that's a great question. 'cause I certainly think there's, you know, definitely a whiff of stagflation here. And I think in the near term, you know, over the next several quarters, you know, it can feel very stagflationary because you're gonna get, you know, if our sort of back of the envelope analysis is right, you know, you're gonna get  inflation that's accelerating along with some rise in the unemployment rate. But I do think there are really key differences here to the seventies period.

And, you know, and I guess what I would also just say is, you know, I use the term inflation in the near term  you know, to talk about, you know, we do think it reaccelerate, but you know, over a kind of a more medium term, you know, we actually don't think these tariffs are inflationary, and maybe this is more academic and more wonky, but this is, the tariffs will cause like a price level adjustment.

So companies will pass on this additional cost by raising prices. That's a one-time adjustment. It's not that it's increasing ongoing inflation forever, right?. So the tariffs actually aren't inflationary. And I raised that point because I think on the back of this, you know, as you have demand that's, there's destruction and demand once you get this price level adjustment that's passed through, it actually could even be disinflationary.

And I think interestingly, you're seeing that playing out in the commodity markets right now, commodity markets and oil, global oil markets have declined. You know, we've gotten some OPEC announcements there as well. But if you look at copper and some other things, they've declined. And the reason why they've declined is because they're pricing in this outlook for demand to be lower and as a result of that demand for commodities to be lower.

So I think, you know, just in terms of the energy price reaction that we've gotten now versus obviously the seventies where clearly it was a huge OPEC shock, energy price shock in particular that drove that. That's different. But I think the other key piece of this is, is kind of, you know, again, what economists called second round effects. Again, not to be too jargony, but how, you know, how wages and how people's expectations for the future inflation really play out.

And you know, in the seventies you saw inflation expectations really accelerate and just labor bargaining power at that time because of higher unionization rates in the United States, a higher manufacturing base resulted in wage inflation that was also just much higher. And that made overall inflation much more persistent, even though you had the unemployment rate that was increasing. And so I would argue that's also a key difference today.

You know, it does seem like longer term inflation expectations, you know, they are relatively anchored, you know, maybe there's some surveys that that kind of are uncomfortable for the Fed and that they've been moving up. But overall it does seem like inflation expectations they're pretty anchored, you know, and obviously there's been less labor bargaining power you know, since then, which should mitigate those second round effects.

GREG HALL: All right. Those are great differences. Thanks for a little bit of history there. I do think it's important for people to be able to draw those differences and many advisors, many clients lived through those times as well. And I think I'll recognize some of those variations between then and now. Libby, you wouldn't know it by watching TV, but other things have probably happened in DC besides tariffs over the last week. Is there anything else that we ought to be focused on in the coming days?

LIBBY CANTRILL: Yes, and before I get there, do you mind if I just also talk about the 1970s…

GREG HALL: I'm not even try to stop you.

LIBBY CANTRILL: …because one thing we did not talk about just before we leave the subject of tariffs, but something that clients are really asking about, and so I'm assuming that advisors are getting asked by their end clients, is the legality around all of these tariffs and could we see the court's rule against President Trump? And it is true. So what we know is that President Trump had three different sort of avenues, approaches that he could have used.

Some were more aggressive but took longer and could have been more durable. And then there was the choice that he used, which was the most aggressive both in terms of the scope of terrorists, but also in terms of the legality. And so he's using something called an IEEPA, the International Emergency Economic Powers Act from 1977.

So going back to a time where we did, we had seen a lot of inflation. So see, I'm trying to tie it back in. But it is a really extraordinary use of the statute of the law to impose tariffs. And so we've already seen some groups file kind of legal court cases against the President against these actions. You know, I think that the courts usually have been pretty deferential to the executive branch when they've used these emergency authorities.

But there are some trade attorneys who think that this is sort of a bridge too far and that actually this could be overruled. So that is just something to watch. The only thing I will just say before people get too excited about the fact that maybe all these tariffs are rolling off because of this is that the President has other tools that he can actually use to impose tariffs.

They're not as sort of flexible as IEEPA but they would basically get to the same destination, it would just take longer, but again, they'd be more legally durable. Okay. So in terms of other things, I will tie it back now. You know, we have been talking to clients about vegetables and dessert and before the President was inaugurated, we were talking about just in terms of the overall economic implications of his agenda, that it would really, it would be predicated on sequencing and then sort of the scope of which policy we were gonna get.

And if you think about these things as vegetables, so tariffs, kind of some of the doge headlines, immigration headwinds as sort of the vegetables and then the dessert as deregulation and tax cuts. We've gotten all vegetables and no dessert. I do think the dessert is coming; it's just taking a while.

And you know, we probably won't see the real direct impact from tax cuts until 2026, but you could see some positive headlines and that could also maybe just mitigate some of the concerns in the marketplace. And I think what you've already seen over the last week is that President Trump is already kind of leaning on Congress to try to accelerate the consideration of that bill.

There is a very lengthy process that I'm not gonna bore everybody with, but that they have to, that both chambers have to go through. But the upshot here is, I would be surprised if you did not have a tax bill by the summer that is actually a bigger tax cut bill than maybe what people expected and has fewer spending cuts than what I think many Republicans on the hill would like. And that is just an acknowledgement of the fact that we may see some slowing because of these tariffs.

And I think in some ways the increased revenues that we would be collecting from the tariffs, 'cause of course tariffs are kind of like a big tax. They do generate revenue, may provide some cover for folks to make a more difficult vote on a bill that may be bigger and may have a bigger net deficit impact. So I think bottom line extension of all the Trump tax cuts, we will see. That's kind of table stakes, if you will. But then I think we will see, you know, the no taxes on tips, the no taxes on overtime, potentially a reduction in the corporate tax rate for manufacturers, an increase in the salt deduction.

I mean, no expansion of the estate tax, but we will see, you know, an extension of that more. Which I know is something that's, that the advisor community cares a lot about. So I think upshot here is that the dessert is coming. It's just that we're, you know, we have to lose weight before we can gain it so to speak. Sorry to belabor a metaphor, but, you know, we, I, Tiffany actually gives like, really like concrete frameworks for clients. I give, you know, food metaphors, but…

GREG HALL: You know everybody understands food. It's a perfect,

LIBBY CANTRILL: It’s true. You know, and I understand food, so, I do. Yes.

GREG HALL: All right, well, look, got you, you've taken time out of an incredibly busy period. We're recording this on what is it, Tuesday afternoon. I've lost track. It's been a whirlwind. Everybody at PIMCO, you know, very busy trying to understand what's going on in markets, reacting you know, doing research, coming up with game plans. So for you to spend this time with us, we really appreciate it. I know our advisors listening really appreciate it. And their end clients who hopefully get to listen as well. Really appreciate it.

Wow! That was a terrific conversation. I learned a ton. It's always a pleasure to not only talk to Libby and Tiffany individually, but having them together, you know, in the midst of a conversation and underlying and adding to each other's points was really a privilege and a great way, I think, to help me get my arms around what's going on now at the intersection of public policy and markets. I would like to remind anybody listening that if you want more information on what you heard today, or to go a little bit deeper on tariffs, market implications, our investment views and outlooks, please visit us at pimco.com.

If you identify yourself as a financial advisor, you'll be taken to Advisor Forum which is our dedicated destination for financial advisors to get the content that they want as quickly and as easily as possible. We will be back to you with David Hammer talking about the municipal market, and possibly in between now and then if market developments give rise to another podcast that we wanna bring you for some more information.