The so-called “Taco trade” has been a boon for some on Wall Street but a headache for almost everyone else, businesses and policymakers in particular.
The acronym – short for “Trump Always Chickens Out” – refers to the US president’s habit of making tariff threats, resulting in a drop in markets, before walking back on the threat (in response to market pressure), causing markets to rebound.
It was coined after Trump’s so-called “Liberation Day” tariff announcement in April which triggered a major market wobble followed by a 90-day pause one week later, followed by a market rally.
The impact of tariffs is one thing but Trump’s increasingly erratic pronouncements and the general uncertainty surrounding US trade policy poses quite a different proposition, one that can’t be planned for.
[ Irish exports surged ahead of Trump’s ‘liberation day’ tariffsOpens in new window ]
Precedent tells us that uncertainty stops consumers making big purchase decisions and stops businesses investing, hence economic forecasts are being pared back.
But the uncertainty also, from the European Central Bank’s (ECB) perspective, complicates the path for interest rates.
There is lag between the monetary policy changes and the effect of these changes on the real economy (days, weeks, months, even years – it is still debated).
So not knowing where consumers and businesses will be in six months makes rate setting something of a stab in the dark.
If ECB policymakers keep rates at relatively restrictive levels and Europe is enveloped in a nasty trade war with the US, they will be caught out.
Conversely, if the ECB lowers rates quickly in response to tariff threats and Brussels and Washington agree a trade deal, they will similarly be caught out, particularly with massive defence spending plans – in Germany and elsewhere – likely to add to inflationary pressure in the coming months.
“While the uncertainty surrounding trade policies is expected to weigh on business investment and exports, especially in the short term, rising government investment in defence and infrastructure will increasingly support growth over the medium term.”
That’s how the ECB characterised its current predicament in a statement accompanying the bank’s latest rate decision on Thursday.
It reduced its headline deposit rate by a further quarter point to 2 per cent, a move that had been seemingly locked in by the latest inflation data for the bloc, which put headline price growth at 1.9 per cent below the bank’s target rate of 2 per cent.
The ECB’s latest rate reduction, the eighth in the current cycle, came with a fresh set of forecasts for the euro zone economy.
The ECB now thinks inflation will be below target in 2026, at 1.6 per cent, with the economy expanding at a slower-than-expected rate of 1.1 per cent.
Despite strong labour markets, rising real incomes and easier financing conditions, ECB president Christine Lagarde warned that risks to growth were still skewed to the downside.
“A further escalation in global trade tensions, and associated uncertainties, could lower euro area growth by dampening exports and dragging down investment and consumption,” she said.
Most EU exports currently face a 10 per cent levy in the US, though that risks rising to 50 per cent in July if negotiations fail.
The relationship between Washington and Beijing also remains uncertain even after both sides lowered their tariffs from prohibitive levels.
Even Lagarde’s tenure as head of the ECB is now subject to a downside risk.
According to World Economic Forum (WEF) founder Klaus Schwab, arrangements for Lagarde to take over the organisation before her tenure at the ECB ends in 2027 are in train.
Lagarde made something of a feeble attempt to scotch this speculation with an insistence that she was determined “to deliver” on her mission and complete her term.
