How Trump's trade policies may impact the Fed: Societe Generale

  • Tariffs could force the Federal Reserve to raise interest rates even faster, according to Societe Generale Chairman Lorenzo Bini Smaghi told CNBC at the China Development Forum.

Tit-for-tat trade penalties between the world's two largest economies could push the Federal Reserve to hike interest rates at a faster-than-expected clip, according to the chairman of one of Europe's largest banks.

"Tariffs may be inflationary for the U.S., which may lead the U.S. to raise interest rates even faster," Societe Generale Chairman Lorenzo Bini Smaghi told CNBC at the China Development Forum in Beijing on Saturday.

President Donald Trump's proposed double-digit duties on foreign aluminum and steel imports as well as taxes of up to $60 billion against Chinese products — including technology — could result in higher consumer prices in the world's largest economy. The price of smartphones, for example, could rise, forcing retailers to pass on the cost increase to shoppers.

Higher prices could stoke inflation, which could impact the Fed's monetary tightening cycle. The central bank increased rates by a quarter of a point last week and is widely anticipated to hike at least three more times this year. But stronger inflation could change that.

The U.S. "may get two bad things," Smaghi said: "First, higher tariffs and higher inflation and then higher interest rates. That's not necessarily good for the U.S. economy."

Tariffs would likely also lead to a weakening of the dollar, he added.

Trump's trade actions are politically motivated and likely aimed at maintaining "the cohesion of his electoral basis," according to Smaghi.

"There is a mid-term election, things don't look that good given what we saw in Pennsylvania," the Italian economist said, referring to Democrat Conor Lamb's recent election victory in the state. "If things don't go well politically, [Trump] may want to tighten his base with measures that, to some extent, correspond to what he promised, but may not be targeted to a win-win situation."