Fed unlikely to save the day as global economy stares down tariff-induced abyss

Investing.com -- As the risk of recession rises sharply following the Trump administration's "Liberation Day" tariffs, some are counting on central banks, including the Federal Reserve, to save the day. But Deutsche Bank (ETR:DBKGn) argues that fiscal measures, not monetary policy, are needed to stem the bleeding.

"This is a US-centric fiscal shock driven by the Trump administration, and it is fiscal policy that can unwind it," Deutsche Bank analysts said in a recent report. "Central banks can help, but the Fed is much more constrained because the US is at the epicenter of the negative supply shock with a big spike in inflation coming."

On Apr. 2, or the so-called 'Liberation Day,' the Trump administration rolled out a minimum 10% tariff on all imported goods in the United States as well as reciprocal levies significantly boosting tariffs on trade partners such as China and the European Union.

The tariff move was the worst case scenario for global trade and drew retaliation from trading partners including China. Beijing said it would impose 34% reciprocal tariffs on imports of US goods and EU has threatened to hit back hard with speculation that US tech companies could be targeted.

Trump's policies, if sustained, would "likely push the US and possibly global economy into recession this year," JPMorgan (NYSE:JPM) said."An update of our probability scenario tree makes this point, raising the risk of a recession this year to 60%."

While the Fed and other central banks are likely to step up and attempt to cushion the economic blow, Deutsche Bank believes that monetary policy may prove a blunt tool.

Relying on rate cuts alone would fail to address the root cause of the crisis: a "huge tax rise" equivalent to the tariffs, which could stifle growth and deepen recession risks, the analysts said.

With U.S. consumers likely to bear the costs of tariffs, Deutsche Bank urged the Trump administration to urgently pivot to fiscal strategies to offset the economic damage, such as direct paychecks to households hit hardest by tariffs or retroactive tax cuts included in the upcoming reconciliation bill.

"The Republican leadership needs to convey a much greater sense of urgency in moving the fiscal package along," the analysts said, criticizing Treasury Secretary Scott Bessent for failing to outline such measures after the tariff announcement. "Waiting until the summer—as they are communicating—might be too late."

In Europe, countries like Spain, Italy, and France have already announced fiscal measures to counter the trade shock. But more is needed, particularly from the likes of Germany -- the economy most exposed to the tariffs, the analysts said. Berlin needs to take decisive action, such as suspending its constitutional debt brake or front-loading tax cuts, they added.

Any fiscal intervention, however, is likely to come later rather than sooner. "Fiscal responses are inherently slower than central bank interventions, leaving markets vulnerable to volatility," the analysts said.

This article first appeared in Investing.com