Chris Hodge, Chief U.S. Economist at Natixis CIB Americas, says the Fed should be cutting rates but is cautious due to tariff risks. He warns inflation may rise as restocking at higher costs begins.

Donald Trump has signed an order to impose tariffs imports into the U.S. from countries including China, Mexico and Canada.

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Chris Hodge, Chief U.S. Economist at Natixis CIB Americas, stated that while inflation has moderated, it remains above 2% and is showing signs of persistence. He noted that the Federal Reserve is cautious about cutting rates due to ongoing risks of significant tariff increases, which could impact inflation and economic stability.

Hodge explained that retailers are overstocking inventories to prepare for potential tariffs, but these inventories will eventually be depleted, requiring restocking at higher costs that may be passed on to consumers. He also suggested that, although a comprehensive trade deal is unlikely, a series of trade truces may reduce some risks but are not expected to boost economic growth.

Hodge: Retailers overstocking to brace for potential tariffs

All right, what do you make of the slide upticks in PCE? What does that mean potentially for the Fed? The idea that while inflation has certainly moderated over the last couple of years, it seems to be kind of sticky above 2%. Yeah, I do think we're going to see a fairly benign print today, somewhere in the mid-teens with regards to basis points on the month-on-month gain. As far as what it means for the Fed, Powell had his testimony in front of Congress just this past week. And he had to defend the lack of Fed cuts. And I think based on backward-looking data, there's a pretty strong case to be made that the Fed should already be cutting and cutting with alacrity. But policy has to be forward-looking. And we still have this huge rolling threat of tariffs. And if the president is promising a 50% effective tariff increase, policymakers need to proceed with caution. And that's just what the Fed is doing. They don't have a great model to deal with a shock of this size. So until we get some sort of clarity on trade policy and assurances that longer-run inflation expectations are well-anchored, I think the Fed is going to be comfortable doing nothing, just as long as the labor data remains OK. All right, so you think it's going to be benign. But I want to ask you, whether it's Fed minutes or reports like the ISM, you continue to see this commentary that manufacturers and other companies, they're increasing prices in anticipation of tariffs. But we have seen considerable pauses and reductions when it comes to China and other countries. Do you think that the anticipation of tariffs is going to be reflected in this PCE and other forward reports? And what about the idea of trade deals? Do you think that people hold back on increasing prices with the idea that, hey, there might be a deal and those tariffs might not be in place? It's a great question. And I don't think that we're going to see the tariffs bite in this print. But retailers have been preparing for these tariffs by overstocking inventories. And these businesses have pretty slim margins. And those inventories are eventually going to be run down. And businesses are going to need to restock at higher prices. And these costs are eventually going to be passed along to the consumer. So I think today's print is encouraging, but I think it's probably the lowest inflation print that we're going to see over the next few months. As far as trade deals are concerned, we're not going to see any durable, comprehensive trade deals. I think more likely what we're going to see is a trade truce with a bunch of countries. So I don't know that this necessarily improves things, but it help does take the left tail risk off of the table. But I don't think it's going to be a tailwind to growth.

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Kyiv

Ukraine Invasion

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Jerusalem

More than 80 people killed in Gaza in one day

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Hodge: Retailers overstocking to brace for potential tariffs

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