5 lesser-discussed aspects of tariffs
U.S. policy—and pause—likely to impact more than inflation and recession fears
On April 1, I released my outlook for the second quarter, forecasting slower growth but still an unlikely chance of recession. However, as I noted, the size and scope of U.S. tariffs were a major question mark already impacting financial markets. The “Liberation Day” announcement made the next day revealed just how large of a question mark tariffs were—and still are.
Markets reacted immediately to the new trade policy that would affect more than 180 countries and territories, and we explored the potential impacts on currency, energy, investments and even housing. Then, the White House announced that there would be a 90-day pause on the full implementation of reciprocal tariffs, a move that may have been made to avoid a liquidity crisis in the bond market.
Where does the U.S. stand now—especially as the tariffs on Canada, Mexico and China remain—and what is the potential impact on the globe? Here’s what we know and what may be ahead:
1. A drag down on U.S. GDP—but not just because of a slower economy: Even before the April 2 tariff announcements, many, myself included, were projecting that economic growth would slow this year. The uncertainty surrounding tariffs will likely be reflected in first-quarter gross domestic product (GDP). That’s due to the surprising degree that companies were pre-buying goods into the U.S. to have the imports already here before the tariffs were implemented. This pre-buying resulted in a large trade deficit to the tune of $131.4 billion in January 2025, compared to $98.1 billion in December 2024, according to the U.S. Census Bureau and the U.S. Bureau of Economic Analysis. The value of imports coming into the U.S. factors into GDP calculations, having a negative effect, so it won’t be a surprise if first-quarter GDP is negative. Looking forward, the tariffs have increased the chance that the economy will slow to the extent of a recession, though recession is still not our base-case scenario.
2. There is a point that large is just large, when it comes to tariffs: The U.S. tariff rate on Chinese imports now totals 145%, with the exception of electronics such as smartphones, computers and microchips, for which there are no tariffs. Is a 145% tariff large? Yes, but when the tariff is as large as 125%, 145% or 150%, it gets to the point that changes to the rate probably matter less. Once the rate is so high, corporations are already unlikely to want to pay that kind of tariff on the value of the goods that they're importing, which shifts demand away from China. There’s diminishing return from increasing the tariff rate any higher at that point.
3. Businesses may be hesitant to make large investments, though tax cuts may offset this: Like consumers, business leaders are dealing with a great deal of uncertainty. Business leaders always face uncertainty, but questions surrounding the effects of tariffs have heightened the level even more. As a result, they may be wondering, “Where are my secure supply chains? Should we delay big investments? Should we delay increasing payrolls until this all settles out?” As a result, even though the tariffs are aimed to increase U.S. manufacturing, corporations may be hesitant to invest in building large factories here, especially if they believe the tariffs won’t last beyond President Trump’s term. On the flipside, extending the Tax Cuts and Jobs Act’s bonus depreciation policy, which allows businesses to immediately deduct expenses for investments in depreciable assets like equipment and some intangible property like software, could encourage corporations to invest in growth even amidst the other uncertainties.
4. Other central banks, in addition to the Fed, may have to cut interest rates: The potential for slower growth in the U.S. has increased the number of projected rate cuts from the Federal Reserve, with two rate-cut announcements likely to come later this year. Additionally, other central banks across the globe will likely have to cut rates because less trade with the U.S. will probably drag down their economies. It’s important to keep in mind that the U.S. tariffs are a global issue, affecting other countries’ economic conditions as well, not just our own.
5. At the same time, U.S. interest rates may have to stay higher for longer: Although this point and the previous one may seem contradictory to each other, tariffs may make inflation rise in the U.S., at least over the next six months, which means that the Fed may have to keep rates higher for longer, even as the economy slows. For investments, this may mean higher yields on cash and bonds. Now this doesn’t mean we may see 7% or 8% yields on longer-term bonds but rather yields in the 4% or 5% range.
Ultimately, if the last few months have taught us any lessons, it’s that the situation can change very quickly and in surprising ways. As always, we will work to keep you informed through our Market Insights page and The Statement.