Kevin Hassett says Fed economists should be 'disciplined' over tariff study

A New York Fed study found that 86% of the Trump-era tariff burden fell on U.S. firms and consumers as of November 2025 (down from 94% in Jan–Aug), with the average tariff rate rising from 2.6% at the start of 2025 to about 13% by year-end and peaking near 16% in April–May. The CBO reached similar conclusions, estimating domestic parties absorb roughly 95% of tariff costs and projecting tariffs will raise the PCE inflation index by about 0.8 percentage points by the end of 2026. White House economic adviser Kevin Hassett publicly attacked the New York Fed paper as partisan and defended the tariffs, while the findings feed into broader Fed debate over inflation and potential rate action.

Analysis

Market structure: Higher tariff incidence (NY Fed ~86% on U.S. consumers; CBO ~95%) implies immediate pricing power for protected domestic producers (steel, basic materials) and margin pressure for import-reliant retailers/consumer discretionary. Expect a 2–4% passthrough to CPI/PCE per quarter in the near term, concentrated in goods-intensive sectors; durable-goods demand will reprice while services remain less affected. Cross-asset: rising tariff-driven PCE (CBO +0.8pp by end-2026) increases odds of Fed hikes → upward pressure on nominal yields and USD strength; commodity industrial metals likely to rise, gold/TIPS bid as inflation hedges, equity multiples compress for high-duration names.

Risk assessment: Tail risks include rapid retaliation triggering export shocks (high-impact, <20% probability) and Fed-tightening-induced recession (~15–25% over 12–18 months if PCE stays >3%). Short-term (days–weeks) volatility around CPI/PCE prints and Fed minutes; medium (3–12 months) profit-margin migration and inventory re-stocking; long-term (1–3 years) structural reshoring. Hidden dependencies: passthrough heterogeneity by firm pricing power, inventory cycles, and contractual FX hedges can mute/lag effects; catalysts: election announcements, tariff schedule changes, and monthly PCE figures.

Trade implications: Direct plays: long domestic steel/materials (NUE, STLD) and inflation-protected assets (TIP) while reducing duration exposure in IG credit if 10y >4.0%. Pair trade: long Nucor (NUE) / short Target (TGT) to capture margin divergence over 3–9 months. Options: buy 3–6 month call spreads on NUE (strike spread sized to risk budget) and buy 3–6 month put spreads on TGT/WMT to limit premium spend. Tactical sector tilt: +overweight XME/SLX (materials), +defense names (LMT), underweight discretionary retail.

Contrarian angles: Consensus underestimates potential for importers to rebuild sourcing (re-shoring) within 12–24 months, which would cap commodity rallies — avoid overleveraged long commodity bets beyond 12 months. The market may be overpricing permanent consumer-price passthrough; if real wage growth resumes and PCE reverts <2.8% within two prints, short-duration reflation trades will reverse. Historical parallel: early-2000s sector-level protectionism lifted basic materials then normalized; expect similar mean-reversion once firms adjust supply chains, so size positions with 6–18 month horizon and explicit stop-losses.

Key Decisions for Investors

• Establish a 2–3% long position in Nucor (NUE) and a 1–2% long in Steel Dynamics (STLD) sized to portfolio volatility; hold 3–9 months and take profits if NUE rallies >25% or if 10y yield rises above 4.25%.
• Initiate a 1.5% short exposure to Target (TGT) via 3–6 month put spread (sell 1 strike, buy deeper put) or short equity if comfortable; target downside if tariffs sustain margin compression ~5–8% EBITDA erosion over 6–12 months.
• Allocate 3–5% to inflation protection: buy TIP (iShares TIPS) or 5–year TIPS direct, and add 1% long GLD or physical gold if PCE prints >3.0% two months in a row.
• Reduce portfolio duration by 0.5–1 year if 10y U.S. Treasury yield breaches 4.0%; replace with short-term corporate or floating-rate notes and increase cash cushion to 3–5% ahead of next Fed decision (within 30–60 days).
• Monitor three catalysts over the next 60 days (monthly PCE prints, any new tariff tranche announcements, and Fed FOMC minutes); if PCE >3.2% or administration raises average tariff >15%, increase materials/industrial exposure by +1–2% and widen short retail positions.