【MACRO Alert】The "crossroads" dilemma under Trump's tariff policy - the choice between rising inflat

Recently, the US economic situation has become complicated, with rising inflation expectations, falling consumer confidence and volatility in the gold market intertwined, bringing many uncertainties to the economic outlook. Chicago Fed President Goolsbee warned that investors in the US bond market are anticipating rising inflation, which would be a "major danger signal" that could undermine policymakers' plans to cut interest rates.

A University of Michigan poll showed that American households' long-term inflation expectations have hit their highest level since 1993. Goolsbee stressed that if investors' expectations converge with those of American households, the Fed must take action, because once the public loses confidence in the central bank's ability to control inflation, a vicious cycle of rising wages and prices could occur.

Although the Fed raised its inflation forecast and lowered its economic growth forecast last week, Chairman Powell still expressed confidence that inflation expectations will be controlled. However, the five-year interest rate, an indicator of market expectations for price growth over the next five years, has reached 2.2%, while respondents in the University of Michigan Consumer Sentiment Survey expect long-term inflation to be 3.9%. This shows that the Fed is under great pressure to control inflation expectations.

It can be said that the Fed is no longer on the "golden path" of 2023 and 2024, when inflation is close to the 2% target without undermining economic growth. Now the economy has entered "another chapter" and faces more uncertainty. Fed officials expect two 25 basis point rate cuts this year, but last week's meeting kept interest rates unchanged for the second consecutive time, and Powell also acknowledged that inflation progress may be delayed.

U.S. consumer confidence fell to its lowest level in four years in March, amid concerns that the Trump administration's escalating tariffs will lead to rising prices and an uncertain economic outlook. The Conference Board's consumer confidence index fell 7.2 points to 92.9, and the index of expectations for the next six months fell to 65.2, the lowest level in 12 years. Consumer optimism about future income has largely disappeared, and concerns about the economy and the labor market are beginning to affect their assessment of their personal situation.

U.S. consumers inflation expectations for the year ahead rose to their highest level in two years in a University of Michigan survey. The question facing economists and Federal Reserve policymakers is whether the weak sentiment trend will translate into a pullback in actual spending, as consumers face continued inflation, high borrowing costs and a weak job market.

Gold prices have risen 15% this year as the escalating trade war has triggered safe-haven demand in the market. Although gold rose slightly in the short term after the data was released, it later fell back to around $3,030. Investors are worried about the global situation, especially US policies, so they buy gold as an alternative asset to hedge against the risk of a global recession that may be triggered by the US government.

Daniel Pavilonis, senior market strategist at RJO Futures, said that the possibility of the Federal Reserve cutting interest rates has decreased, and overall, anti-inflation metals such as gold are still bullish, and the next level is expected to be around $3,125. Some experts pointed out that the next three to six weeks will be a critical period for resolving a series of policy uncertainties, and the "Liberation Day" on April 2, when Trump plans to impose reciprocal tariffs on US trading partners, has attracted much attention. Corporate executives have expressed concerns about the uncertainty of tariffs, including the size of tariffs, exemptions, and the impact on the automotive industry.

Although "soft data" such as sentiment indexes were clearly sluggish, "hard data" showed that the economic foundations remained solid, with low unemployment, a rebound in manufacturing activity, and inflation easing last month. However, economists closely watched changes in labor market indicators, such as the gap between the proportion of consumers who believed that jobs were plentiful and those who believed that jobs were hard to find, which rose to 17.9%.

In summary, the United States is currently facing multiple challenges, including rising inflation expectations, declining consumer confidence, and gold market volatility. The Federal Reserve faces a difficult choice between balancing economic growth and inflation control, and Trump's tariff policy has further increased economic uncertainty. The future direction of the economy will depend on the interaction of these complex factors and the response strategies of policymakers. Investors and consumers need to pay close attention to these developments to make reasonable decisions.