Trump wildcard paralyzes global central banks

• The extent of the blowback on the U.S. is anyone's guess.

The big picture: Central bankers try to prime financial markets for expected interest rate changes down the line.

• But now they are stepping into the equivalent of an economic void, with the unknown effects that a worldwide trade war — mixed with tax cuts, deregulation and other policy shifts — might have on inflation and growth.

"This is uncharted territory for central bankers," Brahima Coulibaly, vice president of global economy and development at Brookings and a former Federal Reserve Board economist, tells Axios.

• "They are less experienced and trained to manage policy and political uncertainty of this magnitude," Coulibaly adds. "Particularly in the United States, which emits the world's reserve currency and where policy has not historically been subject to significant unpredictability."

Between the lines: Trump promises to use tariffs liberally when he takes office, putting sky-high taxes on all imported goods. It would mark a step-up from his first stint in office, when just Chinese exports and select other products, like steel, were in the line of fire.

• Beyond Trump's claims that such policy will reinvigorate domestic manufacturing, tariffs now look like the go-to tool to extract desired changes from other countries.
• That leaves questions about how often (and by how much) Trump might raise the tariff stakes. For instance, Trump trade adviser Peter Navarro told Reuters the incoming president could "just raise tariffs higher" on China if the country devalued its currency.

"[T]he economic outlook is clouded by the possibility of new tariffs on Canadian exports to the United States," Tiff Macklem, the head of Canada's central bank, said last week after announcing a half-point interest rate cut to support its ailing economy.

• "No one knows how this will play out," Macklem added. "This is a major new uncertainty."
• Meanwhile, Chrystia Freeland — Canada's finance minister who resigned Monday — warned against new plans for government spending before Trump takes office: The country needs to keep its "fiscal powder dry today, so we have the reserves we may need for a coming tariff war," Freeland said in a statement.

Speaking in Frankfurt last week, European Central Bank president Christine Lagarde listed some of the unknowns: the scope of measures, the scale of retaliation and how trade traffic might be rerouted to avoid them.

• "That is a very complex situation, with movable parts," Lagarde said.

The Fed, which will probably announce a quarter-point rate cut this Wednesday, says it can't set policy based on how Trump's tariff agenda might take shape.

• The lack of clarity makes the Fed's projections, a fresh set of which are due out Wednesday, more hazy.

• "We don't know how big they'll be, we don't know the timing and duration," Fed chair Jerome Powell said at a New York Times conference this month. "We can't really start making policy on that. We have to let this play out."

Australia's head central banker, Michele Bullock, echoed that message last month. "We don't actually know what will happen. ... We can't be jumping at shadows."

The other side: The anticipation of Trump's policies alone was enough to push South Korean central bankers to lower borrowing costs for the second time in as many months — the nation's first back-to-back rate cut in 15 years, which surprised financial markets.

• The magnitude of the "red sweep" — on top of Trump's victory — "was well beyond our expectations, sending shockwaves with wide trade implications across the globe," the nation's top central banker said announcing the decision, according to The Korea Times.

What to watch: Trump's policies are anticipated to be inflationary, keeping rates higher in the U.S. That is one reason behind the U.S. dollar surge: a response to expected policy before Trump has taken office.

Continued dollar appreciation might wreak havoc around the world — one way the knock-on effects from tariffs might slam other nations.

• A stronger dollar here can stoke inflation abroad as imports get more expensive for nations with weaker currencies.
• For highly indebted nations, dollar-denominated debt becomes much pricier to pay off.

The bottom line: "The extent of the worry tends to be correlated with the extent of the dependence on the U.S.," Coulibaly says.

• "But given the role of the dollar and U.S. monetary policy, and the way in which it spills over into global financial markets, all countries are monitoring this."