Federal Reserve Chairman Jerome Powell said President Trump’s tariffs are higher than expected, increasing the risk of further inflation.
President Donald Trump’s tariffs are expected to increase unemployment over the course of the year, but no major layoffs are expected.
An allianz economist said in a report released Thursday that he noted an indicator that shows that the U.S. labor market remains stable “despite increasing economic headwinds” and that resilience should continue into the first half of this year.
“The employment rate will be the first to show a recession (expected in Q2-Q3), but we don’t expect any major layoffs,” they explained. “The US economy faces a unique combination of supply constraints (more than traditional ideas) and increasingly strict immigration policies. Therefore, businesses are more likely to take away the lack of labor compared to previous episodes of recession, preventing a surge in unemployment.”
“Despite the inflationary effects of sudden tariff hikes and sustained high policy uncertainty, US companies are still enjoying healthy benefits and facing a rise in the workforce, so we don’t expect any major layoffs. Still, we expect unemployment to peak at 5% in 2026.”
New York Fed Surveys Jump to the highest level of unemployment since 2020
President Donald Trump’s tariffs are expected to increase inflation this year, Allianz economists predict. (Anna Money Maker/Getty Images/Getty Images)
The unemployment rate was 4.2% in March, the most recent month when data was released by the Labor Bureau, so the Allianz analysis saw unemployment rates of 0.8% points (PP) by the remaining first quarter of 2025.
The Trump administration’s efforts through Government Efficiency (DOGE) to help governments reduce the size of their federal workforce are ongoing. The lawsuit has been filed against several of the downsizing moves that have maintained efforts to fire federal employees on probation.
Allianz doesn’t expect the unemployment rate to rise significantly due to reduced workforce at federal agencies.
How Trump’s tariffs will affect the labor market
Trump’s “mutual” tariffs have raised import taxes on trading partners based on the US trade deficit. (Andrew Harnik / Getty Images / Getty Images)
“Doge-led federal layoffs are unlikely to shake the labor market,” the economist explained. “Layoffs of employees who denounce institutions such as the Department of Education and USAID will begin to appear in the data in the coming months.”
“In October alone, the employment report could capture the impact of 75,000 federal employees who chose to resign after being postponed. In total, we expect federal employment to decline at nearly 200,000 this year. More than 10% of annual employment increases will not be able to find another job (but remain in the workforce) even in extreme scenarios where more than 10% of the annual employment increase will be fired or resigned.
Analysis shows that the labour market will gradually weaken over the year, and the “inflationary spike from summer tariffs” will gradually weaken, so the Federal Reserve expects interest rate cuts to progress between the end of 2025 and early 2026 will support the full employment component of its dual mission.
The fear of a recession, the rapid urge to see tariff uncertainty plunge into consumer sentiment
Trump’s tariffs have prompted a rise in levels of volatility in financial markets. (Reuters/Reuters)
The Allianz economist also said that following Trump’s so-called “liberation day” tariff announcement, investors initially moved to traditional safe assets like the US Treasury Department and the dollar. However, once the scale of “mutual” tariffs became clear, it focused on expectations that tariffs would push inflation higher and slow down the FRED rate reductions that were previously expected to arrive, preventing travel from those safe shelters.
“The market quickly adjusted expectations and pushed for a reassessment of monetary policy’s future path and lifting yields, particularly at the long edge of the curve,” they wrote. “But the more structural, perhaps more concerning explanations have gained traction: a wave of global sales from the US Treasury Department and the US in general.”
Click here to get your Fox business on the go
“This is supported by the rare outbreak of lower US yields. Higher yields usually attract foreign capital and strengthen the capital,” explained the Allianz Economist. “The fact that opposition has arisen suggests that not only do the major holders sell the Treasury Department, but also convert revenues into currency, perhaps reallocating them to the European market.”
