08/08/2025
Tariffs continue to dominate the headlines of business news in 2025 and that's unlikely to change any time soon. As noted here, the expectation is for higher baseline inflation (perhaps past 3.5% year-over-year) resulting from tariffs along with adverse impact on employment in a number of sectors. While not noted here, there is the increased risk of stagflation which we haven't seen to any extent since the 1970s.
Recent comments by the president of the Federal Reserve bank of Cleveland confirm this concern. In an interview Kelly O'Grady noted that Americans may expect to see higher inflation as businesses begin passing on rising costs. As business inventories dwindle, importers and businesses are likely to no longer absorb these tariff taxes and pass these costs onto consumers resulting in higher prices and inflation.
Investors should expect that the Fed will remain cautious in light of these results. While some analysts are still forecasting three Fed rate cuts before the end of 2025, I believe that is way off the table. In fact, my prediction for two quarter point rate cuts starting in September is being revised to one and that may not occur before December.
To prepare for the new reality, investors need to balance both inflation and recession risks. The former can best be mitigated by investing in US Treasury-Protected Bonds (TIPS), floating rate note bond funds, and gold. The best way to position to mitigate recession risk is continued investment in large-cap US stocks that have the deep pockets and broad global markets to weather the coming storms.
Please don't hesitate to reach out if you would like to discuss any of these topics in more detail.
Steve Stanganelli, CFP
To view this in the Clear View Wealth Advisors library: https://taxwealthnetwork.advisorlibrary.com/us-tariffs-liberatio-2vmdldx1yl
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Principal Asset Management -
Seema Shah, Chief Global Strategist
Christian Floro, Market Strategist
What happened
Today marks the delayed deadline for implementing reciprocal tariffs. Reciprocal tariffs, originally announced on April 2, also known as “Liberation Day,” saw U.S. import tariff rates rise significantly for over 50 trade partners before being temporarily lowered to 10% until July 9 to allow for negotiations.
Late Thursday night (July 31), President Trump signed an executive order announcing a new set of tariffs (thankfully alphabetized this time – small mercies). Reciprocal tariffs have been set at a 10% global minimum, with levies sitting at 15% or higher for countries that hold trade surpluses with the U.S. Several key trade partners, including the EU, Japan, and South Korea, have negotiated a 15% tariff. In contrast, others, such as China, Mexico, and Canada, face higher rates. Notably, the EU, Japan, and South Korea have carve-outs reducing the levy on autos from 25% to 15%. The tariffs are due to take effect after August 7.
Overall, the newly announced rates are lower than those announced on Liberation Day, but higher than the 10% baseline that had been in motion since late April when the 90-day reprieve was announced. The average effective tariff rate now sits at 15%, the highest level since the 1930s Smoot-Hawley tariffs and meaningfully higher than the 2% at the start of 2025.
Market reaction
The market response to the latest tariff announcements has been subdued relative to the post-Liberation Day reaction, and, overall, U.S. equities are sitting near their all-time highs, with global markets also much stronger than they were at the start of the year.
This likely reflects the fact that Trump’s tariffs have had a limited macro impact so far (although the latest jobs report does indicate greater weakness in the labor market), and the latest earnings season is showing earnings growth beating forecasts, suggesting that companies are navigating tariff headwinds without too much stress.
How does the tariff announcement compare with expectations?
So far, some country-level tariff announcements have been slightly more punitive than we and the broader market had anticipated, but less punitive on a sectoral basis. Our baseline expectations, as set out in the market bulletin “U.S. Tariffs: The end of the 90-day reprieve...”, was for the average effective U.S. tariff rate to ultimately settle at around 17%, slightly higher than the current level of 15%. There is potential for the effective tariff rate to rise further from here.
Even with the latest tariff announcements, trade-related headlines are unlikely to fade anytime soon. Since the newly announced tariffs won’t take effect until after August 7, there’s still time for additional trade deals to be reached in the coming week. Meanwhile, negotiations with China and Mexico remain unresolved, and the White House is expected to announce further sector-specific tariffs targeting industries such as pharmaceuticals and semiconductors. At the same time, ongoing legal challenges could weaken the durability of broad-based tariffs, potentially prompting the administration to focus more heavily on targeted, sectoral measures.
Also worth keeping in mind – the administration’s liberal use of tariffs as a negotiating tool to extract non-economic concessions means that tariff noise will likely remain a permanent feature of the economic backdrop for the remainder of this U.S. administration.
Macro impact
So far, the U.S. economy has held up relatively well, with activity data suggesting only a modest cooling in U.S. growth. However, July’s very weak jobs report suggests that the economy may already be feeling the brunt of tariffs. It’s worth remembering that, in a bid to beat the tariff shock, there was a significant front-loading of U.S. imports earlier in the year. Not only did this boost growth for many U.S. key trading partners, but it also cushioned the blow for both U.S. consumers and companies. However, that front-loading likely just postponed the economic fallout, rather than preventing it.
As stockpiles are run down and as new tariffs come into effect, someone will have to absorb the tariff: either the global exporters, the U.S. importers, or U.S. consumers. So far, data suggests that (for the imports that were subject to tariffs), few global exporters have absorbed the tariff increases.
U.S. growth: Our estimates suggest that the overall tariff impact would ultimately result in a 1.7% drag on annual U.S. GDP growth over the next few years. It is important, however, to note that there is significant variability around this estimate. While we assume that substitution effects—which see some tariffed goods trade flows replaced by domestic sources—could mitigate some of the adverse effects, other factors, such as behavioral or preference changes and currency movements, could also increase or reduce the growth impact of tariffs.
Inflation: Our baseline scenario also sees in a one-off tariff-induced boost to inflation of 1.6%, likely bringing core inflation up to 3.5% by year-end. While unlikely to lead to a persistent inflationary impulse, the Federal Reserve is rightly concerned that the impact could further fuel inflation expectations, especially as overall price stability remains elusive.
Global growth: The subsequent decrease in export volumes and tariff retaliation for impacted economies would also create a negative growth impact outside the U.S., albeit the range of outcomes is broad. Countries most dependent on the U.S. for trade are likely to see the most significant impact: punishing Mexico and Canada, while being milder for China and the EU.
Impact on investors
In the near term, risk-on sentiment may need to contend with an economic outlook of slowing growth, elevated inflation, and ongoing policy uncertainty. So far, companies have navigated the tariff noise without much visible strain, but pressures are likely to grow.
Yet, aggregate corporate sector balance sheets are well-positioned to absorb the headwinds. Overall cash holdings as a percentage of liabilities are elevated, particularly in comparison to historical levels, indicating ample buffers in the event of a revenue or cash flow squeeze. Moreover, profit margins remain high, and overall leverage remains manageable. While there may be some weakness ahead, this is a headwind that the U.S. economy can navigate.
Disclosures
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