Here's how Barclays thinks the Fed could react if Trump enacts tariffs plan

Investing.com -- Republican presidential candidate Donald Trump's tariff proposals would dent earnings in S&P 500-listed companies if he should enact them after winning a second term, according to analysts at Barclays.

Trump has outlined plans to impose aggressive tariffs on the $3 trillion worth of imports into the US, including a 10% to 20% levy on all foreign goods and a 60% tax on items from China.

The former president has said the tariffs are needed to protect working-class jobs and crack down on what he has deemed to be unfair practices by US trading partners, particularly those with which Washington runs a large bilateral trade deficit, such as China and the European Union.

During his first term, then-President Trump oversaw a period of high trade tensions with Beijing that stemmed from a raft of tariffs slapped on Chinese-made goods. Current President Joe Biden's administration has left most of Trump's tariff in place.

Funding raised by the Trump's latest tariff plan, estimated to be in the trillions of dollars, could help offset the costs of sweeping corporate tax cuts that he is also targeting, according to media reports.

But in a note to clients on Thursday, the Barclays analysts projected that the tariffs proposal would lead to a 3.2% drag on S&P 500 earnings next year, along with an additional 1.5% hit if countries choose to retailate with similar measures.

"While the direct impact seems modest, second-order effects from a combination of higher prices and lower-growth shocks that tariffs imply could act as an incremental headwind to corporate earnings," the analysts wrote.

They added that the "materials, discretionary, industrials, technology, and healthcare sectors" appear to be "most at risk" from the tariffs "given their strong dependency on global supply chains."

Beyond equities, the Barclays analysts said the tariffs would lead to supply constraints, lifting prices and fueling a short-term rise in inflation, "especially in the US."

The Federal Reserve, which is widely tipped to begin ratcheting down interest rates from 23-year highs at its next meeting on Sept. 17-18, would likely choose initially to keep borrowing costs elevated in response to the inflation uptick, the analysts projected.

"But as activity starts weakening, amid trade policy uncertainty and tighter financial conditions, we would expect the Fed to ease policy rates more aggressively, possibly as much as [100 basis points]," the analysts said.

Following a key presidential debate between Trump and Democrat Kamala Harris on Wednesday, national polling shows Trump's rival holding a narrow lead for the White House, although the race remains tight in crucial swing states.

Regardless of the outcome of November's ballot, the Barclays analysts projected that the US Congress will remain divided at least at the beginning of either Trump or Harris's administrations. As a result, they argued that the new president would likely need to "resort to executive and regulatory actions to advance policies that do not require legislation."

"For example, the president has wide authority to set tariffs," they added.