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Tariffs could lead to short-term economic overheating

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Long-term impact could be negative for stocks, credit

By Davide Barbuscia

NEW YORK, Feb 3 (Reuters) - U.S. President Donald

Trump's willingness to calibrate economic policies based on

market signals will be key for U.S. inflation and growth

prospects, PIMCO's Chief Investment Officer Dan Ivascyn said on

Monday, after tariffs on U.S. trade partners roiled markets.

Investors on Monday scrambled to make sense of escalating

trade tensions after Trump announced broad tariffs on Mexico,

Canada, and China over the weekend. By Monday, he temporarily

halted Mexico's tariffs following a border security deal, while

those on Canada and China remained on track.

Markets were whipsawed by tariffs news, with stocks selling

off initially but then paring some of their losses after news of

a month-long tariff suspension with Mexico.

"We're really trying to just understand the degree to which

the Trump administration is willing to calibrate policy based on

market signals and the actual data," said Ivascyn at PIMCO, a

bond-focused investment firm with about $2 trillion in assets.

"Even independent of the tariffs decision, we have an

economy where inflation is still above target," he said in an

interview. "Some of Trump's policies ... could be positive for

growth long-term, but could lead to a little bit of inflationary

pressure or risk of some overheating in the short term."

Analysts estimate tariffs may fuel inflation while dampening

economic growth and corporate earnings.

The risk of an aggressive tariffs approach, in addition to

stoking price pressures, could be retaliation from trading

partners, which could lead to a "meaningful hit" on U.S. growth,

said Ivascyn.

"In the extreme form, it likely would be negative for risk

assets and probably on the margin a little bit positive for

bonds," he added.

U.S. long-term Treasury yields declined on Monday as

investors sought cover in the safety of government debt amid

tariff volatility. Yields move inversely to prices.

On the other hand, short-term Treasury yields, which more

closely reflect expectations of monetary policy changes, rose as

investors assessed whether price pressures could prompt a long

pause on rate cuts from the Federal Reserve.

Ivascyn said an environment of high interest rates for

longer than anticipated due to elevated inflation could be bad

for equities and corporate bonds, prompting him to add interest

rate exposure through longer-dated Treasuries in recent months.

"Inflation already continues to be elevated, and if you look

at market pricing, there's just a lot of optimism embedded in

risk asset valuations," he said. "This is a tricky environment."