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Trump tariffs could reheat inflation if countries retaliate

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Neel Kashkari, President and CEO, Federal Reserve Bank of Minneapolis, speaks at the Milken Conference 2024 Global Conference Sessions at The Beverly Hilton in Beverly Hills, California, U.S., May 7, 2024. 

David Swanson | Reuters

Minneapolis Federal Reserve President Neel Kashkari said Sunday that President-elect Donald Trump‘s tariff proposals could worsen long-term inflation if global trade partners were to strike back.

One-time tariffs, Kashkari said on CBS’ “Face the Nation,” “shouldn’t have an effect long run on inflation.”

“The challenge becomes, if there’s a tit for tat and it’s one country imposing tariffs and then responses and it’s escalating. That’s where it becomes more concerning, and, frankly, a lot more uncertain,” Kashkari said.

During his first term, Trump essentially sparked a trade war with China when he imposed a series of import taxes on Chinese goods, which triggered the country to retaliate with its own set of tariffs on the U.S.

One of Trump’s primary economic proposals for his second term is to impose universal tariffs on all imports from all countries — with a specifically targeted 60% rate on China.

Economists, Wall Street analysts and industry leaders have repeatedly expressed concerns over the inflationary impact of that hardline trade approach, especially since inflation has just begun to cool from its pandemic-era peaks.

“We’ve made a lot of progress in bringing inflation down,” Kashkari said. “I mean, I don’t want to declare victory yet. We need to finish the job, but we’re on a good path right now.”

The Fed on Thursday passed its second consecutive interest rate cut, continuing its effort to loosen monetary policy as inflation approaches the central bank’s 2% target. Kashkari said he expects another cut to come in December, but that will depend on “what the data looks like” at that time.

As for Trump’s other major policy proposals like a sweeping immigrant deportation plan, Kashkari noted that the inflation threat is still unclear and so the Fed is still taking a “wait and see” approach before adjusting its policy.

Trump and his backers like billionaire Tesla CEO Elon Musk have also been outspoken about their desire to give the president input on Fed policy decisions. The central bank views its political independence as a core feature that allows it to shape monetary policy exclusively based on the health of the U.S. economy, not election incentives.

But Kashkari said he is not concerned about politics permeating Fed decisions.

“I’m confident that we will continue to focus on our economic jobs,” he said. “That’s what should be dictating what we’re doing and that is what’s dictating what we’re doing.”

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Swiss government proposes tough new capital rules in major blow to UBS

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A sign in German that reads “part of the UBS group” in Basel on May 5, 2025.

Fabrice Coffrini | AFP | Getty Images

The Swiss government on Friday proposed strict new capital rules that would require banking giant UBS to hold an additional $26 billion in core capital, following its 2023 takeover of stricken rival Credit Suisse.

The measures would also mean that UBS will need to fully capitalize its foreign units and carry out fewer share buybacks.

“The rise in the going-concern requirement needs to be met with up to USD 26 billion of CET1 capital, to allow the AT1 bond holdings to be reduced by around USD 8 billion,” the government said in a Friday statement, referring to UBS’ holding of Additional Tier 1 (AT1) bonds.

The Swiss National Bank said it supported the measures from the government as they will “significantly strengthen” UBS’ resilience.

“As well as reducing the likelihood of a large systemically important bank such as UBS getting into financial distress, this measure also increases a bank’s room for manoeuvre to stabilise itself in a crisis through its own efforts. This makes it less likely that UBS has to be bailed out by the government in the event of a crisis,” SNB said in a Friday statement.

‘Too big to fail’

UBS has been battling the specter of tighter capital rules since acquiring the country’s second-largest bank at a cut-price following years of strategic errors, mismanagement and scandals at Credit Suisse.

The shock demise of the banking giant also brought Swiss financial regulator FINMA under fire for its perceived scarce supervision of the bank and the ultimate timing of its intervention.

Swiss regulators argue that UBS must have stronger capital requirements to safeguard the national economy and financial system, given the bank’s balance topped $1.7 trillion in 2023, roughly double the projected Swiss economic output of last year. UBS insists it is not “too big to fail” and that the additional capital requirements — set to drain its cash liquidity — will impact the bank’s competitiveness.

At the heart of the standoff are pressing concerns over UBS’ ability to buffer any prospective losses at its foreign units, where it has, until now, had the duty to back 60% of capital with capital at the parent bank.

Higher capital requirements can whittle down a bank’s balance sheet and credit supply by bolstering a lender’s funding costs and choking off their willingness to lend — as well as waning their appetite for risk. For shareholders, of note will be the potential impact on discretionary funds available for distribution, including dividends, share buybacks and bonus payments.

“While winding down Credit Suisse’s legacy businesses should free up capital and reduce costs for UBS, much of these gains could be absorbed by stricter regulatory demands,” Johann Scholtz, senior equity analyst at Morningstar, said in a note preceding the FINMA announcement. 

“Such measures may place UBS’s capital requirements well above those faced by rivals in the United States, putting pressure on returns and reducing prospects for narrowing its long-term valuation gap. Even its long-standing premium rating relative to the European banking sector has recently evaporated.”

The prospect of stringent Swiss capital rules and UBS’ extensive U.S. presence through its core global wealth management division comes as White House trade tariffs already weigh on the bank’s fortunes. In a dramatic twist, the bank lost its crown as continental Europe’s most valuable lender by market capitalization to Spanish giant Santander in mid-April.

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