For those of you that I saw at the Advisor Summit last month, it was great to get a chance to visit and catch up. 2025 has already been an interesting year as we start to turn the page to summer. As I write this on May 7, the Fed decided to leave rates steady noting there is uncertainty about whether they will need to focus on the risks of inflation, or the risks of potentially weaker employment numbers (Timiraos). Given the Fed’s dual mandate of price stability and full employment, Jerome Powell is caught between conflicting goals given the current outlook.
The tariffs announced on April 3, and paused less than a week later, are likely to be inflationary for the economy (Hyatt). Additionally, given the uncertain outlook where a tweet (or Truth Social post) can change global trade expectations, corporations will be hesitant to hire or deploy capital with tariff ambiguity for an indefinite period. Raising rates to combat inflation again could restrict the economy enough to contribute to an increase in the unemployment rate. Lowering rates could exacerbate potential tariff-related inflation. This could prove difficult for Jerome Powell and the Fed to navigate.
Last year, the Fed was being looked at positively for helping orchestrate a soft landing for the US economy albeit not getting inflation down all the way to the target two percent (Mena). They have found themselves back in a situation where investors are looking to see what they can do to keep the economy humming. The main difference this time is they do not necessarily have the tools to fight this war. Monetary policy is a blunt instrument and navigating the tariff uncertainty necessitates a scalpel. This is a supply-side shock, similar to COVID in nature but not magnitude, and could cause potential shortages and inflation no matter what path they take.
Since the tariff pause, markets have been optimistic, with the SPY SPDR S&P 500 ETF Trust up 11.69% from April 8 through the end of April. That said, the same ETF is down 5.38% YTD through April 30. This suggests optimism that the US will get trade deals done before July 8 and avoid the bulk of the announced tariffs in April. To illustrate the sudden market moving potential of White House trade announcements, an announcement was made today as I’m about to turn this article in 5/12 that there is a tariff pause between US and China, lowering reciprocal tariffs to 10% (Schwartz, Douglas and Feng). Markets are reacting positively to this, and I expect upward and downward volatility to be the norm until we see definitive, long-term deals announced.
Hyatt, Diccon. Tariffs May Push Up Inflation Just As It Was Getting Better. 9 May 2025. https://www.investopedia.com/tariffs-may-push-up-inflation-just-as-it-was-getting-better-11731337
Mena, Bryan. America’s economy just achieved the rare feat of a soft landing. 30 October 2024. https://www.cnn.com/2024/10/30/economy/us-economy-gdp-q3
Schwartz, Brian, Jason Douglas and Rebecca Feng. Surprise U.S.-China Trade Deal Gives Global Economy Reprieve. 12 May 2025. https://www.wsj.com/economy/trade/surprise-u-s-china-trade-deal-gives-global-economy-a-big-reprieve-b486da7b?mod=WSJ_home_supertoppermiddle_pos_3
Timiraos, Nick. Fed Warns of Rising Economic Risks as It Leaves Rates Steady. 7 May 2025. https://www.wsj.com/economy/central-banking/fed-keeps-rates-steady-as-tariff-uncertainty-roils-outlook-55ebe99f
