Less Dumb Investing

A note: I am generally perma-bullish. I believe that, for the most part, a free market economy can balance out localized constraints. However, I am highly concerned that the latest tariff actions will cause a recession.

Here’s a harsh dilemma for Jerome Powell’s Federal Reserve: how do you encourage maximum employment and stable prices when a recessionary event is triggered by a price spike? The Fed has three mandates

1. Stable prices
2. Maximum employment
3. Moderate long term interest rates

Let’s outline a possible scenario for the medium-term future. Imagine a world with a reduced labor force, higher prices, and increased barriers to entry. The immediate, big-ticket effects become clear. For example, a home that previously cost $1,000,000 now carries an additional $100,000 price tag. Cars that once averaged $48,039 now cost 10-14% more, bringing the average vehicle price close to $53,000.

And those are just the big-ticket items. All the everyday goods primarily imported from Asia will be at least 25% more expensive. Our biggest trading partners, Mexico and Canada, now have allies across the globe supporting their efforts to isolate the U.S.

Consumers who rely on basic necessities will experience strong initial sticker shock and reluctantly accept a reduced selection of products. As a result, individuals begin purchasing less. Some may choose to save more, while others will face layoffs as production facilities, service sectors, and other industries contract due to declining demand.

We enter a full-blown recession, where a positive feedback loop—where one action reinforces another—creates a fully negative situation. Reducing interest rates is the traditional response to an economic slowdown. The theory goes that lower rates lead to increased economic activity by reducing the cost of borrowing. That’s why the Fed is both the Savior of Last Resort and the Lender of Last Resort.

So how does inflation react?

I need to issue a disclaimer: there are two conflicting sets of data and I don’t know how things will turn out. One set refers to the period after the Great Recession of 2009, when lower interest rates did not lead to higher inflation. In fact, during that time, low inflation was one of the key concerns of Janet Yellen’s Federal Reserve. The second set of data covers the period we’re more immediately familiar with—the three to four years following the COVID-19 spike. Inflation was extremely high between 2021 and 2024.

So how does inflation react?

If we assume (and this is a tenuous assumption) that lowering interest rates increases inflation, then the inflationary spike caused by tariffs could be even more severe. In a stagflation environment, the Fed’s ability to manipulate economic levers becomes significantly constrained. That is the stagflation constraint.

So, who can save us from the looming tariff threat? Congress. The U.S. Legislature holds the constitutional authority to regulate interstate commerce, not the Executive branch. However, the Trade Expansion Act of 1962 granted the president the power to adjust tariffs based on national security concerns, while the Trade Act of 1974 allows the president to take action against unfair trade practices. Several other legislative acts exist, but the key takeaway is that these were extensions of authority granted by Congress.

So, when does Congress act? Most likely, they will act when it’s too late—when we are already deep in a recession.