Price Hikes and Panic Buying: Auto Market Uncertainty Amid Trump Tariffs - Fed Report

(The News Pulse) – Prices are increasing and economic growth is starting to decelerate in various regions due to businesses and families adjusting to U.S. President Donald Trump’s unpredictable implementation of extensive tariffs designed to alter international commerce, according to a report released Wednesday by the Federal Reserve.

Known as the "Beige Book," this report highlighted initial impacts from Trump’s policies, noting a surge in car purchases before anticipated increases in import tariffs. However, overall business activity declined as companies struggled to adapt to rapid changes and hesitated making significant investments due to perceived disorderly circumstances. The document also mentioned instances of swiftly fluctuating prices or imminent sharp hikes, along with suggestions of impending job cuts.

The U.S. central bank stated in its most recent report on the country’s economic status, compiled through surveys, discussions, and insights gathered from business and community liaisons at all twelve Federal Reserve district banks, "There was widespread concern about uncertainties in international trade policies." The statement also noted, “In multiple districts, the outlook significantly deteriorated due to heightened economic uncertainty, notably concerning tariff issues.”

To accurately reflect both the current economic situation and sentiment just prior to every Federal Reserve policy meeting, the Beige Book has proven to be exceptionally well-timed. The latest version is derived from data gathered up until April 14, covering a timeframe marked by an accelerated rise in international trade conflicts.

Federal Reserve Chairman Jerome Powell has stated that the report is crucial for forming his perspective on which direction things are moving.

Cleveland Federal Reserve officials characterized the local economy as 'flat,' with reports from construction sector participants suggesting that an upturn in demand might not last. These contacts anticipated a decline in demand over the next few months because of rising construction expenses linked to tariffs and economic uncertainties.

The Richmond Fed reported that a coffee roaster was experiencing unprecedented cost hikes, a sheet metal fabricator had doubts regarding upcoming orders because of steel tariffs causing prices to rise, and a military equipment manufacturer stated that circumstances were too unpredictable to decide on future investment plans.

Companies mentioned that they were getting correspondence from suppliers and distributing notices to clients alerting them that costs might rise shortly because of tariffs. Multiple enterprises stated that without clearer insights into how these tariffs would affect them, they were cutting back on fresh investment opportunities and preparing for different potential expense situations, according to the Richmond Fed.

The Chicago Federal Reserve noted that for one machinery producer, suppliers were adjusting their prices every day.

Officials from the Atlanta Fed mentioned potential job cuts, indicating that an increasingly significant portion of their contacts anticipated minor workforce reductions due to declining demand or rising costs. Some contacts expressed concern that unclear trade policies might decrease demand and prompt further downsizing. Similarly, officials at the St. Louis Fed reported that companies were discussing possible staff reductions.

Powell and other officials from the Federal Reserve suggest that the tariffs could result in increased inflation along with reduced economic growth, which presents a complex challenge since the main tool available to the central bank—the management of short-term interest rates—can address only one issue at once.

Several early indications of this poisonous combination of stagflation could also be seen in the Beige Book.

For example, the San Francisco Federal Reserve stated: “There was a slight decline in employment levels, with businesses spanning various sectors and regions mentioning recent as well as upcoming job cuts. Wage growth remained minimal. In general, prices increased moderately, and pressure on pricing escalated notably for numerous imported products and raw materials.”

For the time being, central bankers intend to hold off on actions until they observe the outcomes of Trump's tariffs and monitor how prices and the labor market develop in reality.

Even Chicago Fed President Austan Goolsbee, who is often seen as one of the more dovish members of the Federal Reserve's policymaking circle, has stated his intention to wait for clarity before taking action. This decision comes particularly because the 4.2% unemployment rate suggests a robust job market remains intact. Additionally, the inflation rate measured at an estimated 2.3% in March using the Fed’s favored metric, is approaching their target level of 2%.

Cracks are starting to appear now. Both household and business confidence have plummeted, with surveys indicating that families anticipate an increase in inflation within the coming year. Despite this, most indicators suggest that long-term inflation expectations—which the Federal Reserve believes can impact actual inflation—remain steady.

Trump has attacked Powell for not cutting rates, accusing the Fed chair of courting an economic downturn that most analysts say is becoming more likely due to Trump's trade policy that is both more aggressive and less predictable than expected.

The financial markets anticipate that the Federal Reserve will begin lowering interest rates starting in June. The upcoming rate-setting meeting for the Fed is scheduled for May 6-7, and officials are anticipated to maintain the current policy rate of between 4.25% and 4.50%.

The Beige Book included 80 references to uncertainty, which is almost double the amount from the previous report, along with 107 mentions of tariffs.

However, there were additional issues apart from trade. The Richmond Fed’s contacts noted job reductions because of budget cutbacks at the federal level, affecting both employees and contractors. Meanwhile, in Montana, according to the Minneapolis Fed, a representative from the construction industry linked the rising number of unemployed workers to the deceleration of federally supported initiatives.

(Reported by Ann Saphir; Edited by Andrea Ricci and Chizu Nomiyama)