Tariff Confusion

May 12, 2025

Financial Markets

Equity markets had a relatively uneventful week due to growing trade policy uncertainty and a stream of mildly disappointing economic data. Investors are increasingly aware that the Federal Reserve is unlikely to ease monetary policy soon, a realization that continues to weigh on sentiment.

The tone changed sharply over the weekend after the U.S. and China agreed to substantially reduce tariffs on each other’s goods for 90 days, signaling a significant thaw in trade tensions. President Trump’s reciprocal tariff on Chinese imports will drop from 125% to 10%, while Beijing will cut its retaliatory levies to the same level. Although a separate 20% U.S. tariff linked to China’s alleged role in the fentanyl trade remains in place, the temporary 90-day easing window will allow time for continued negotiations.

Economics

As evident in our commentary on financial markets, the line between politics and economics continues to blur—an increasingly concerning trend. While political influence over economic matters is not new, its prevalence and impact have grown more pronounced.

The administration’s aggressive trade stance remains the most significant and potentially disruptive issue. President Trump’s assertion that tariffs will restore American economic dominance is not backed by historical precedent. The United States is already the wealthiest and most powerful nation globally, and the implementation of tariffs risks undermining the existing global trading system.

Rather than promoting cooperation, the administration’s approach is encouraging the formation of regional trading blocs—some gravitating toward China—seeking to insulate themselves from what is increasingly viewed as predatory U.S. trade behavior.

Public support for the administration appears to be waning, with approval ratings continuing to fall. Interestingly, this decline comes before the expected inflationary effects of tariffs have fully materialized. Many voters who once tolerated the President’s conduct, trusting in his ability to address economic concerns, are now expressing disappointment in both behavior and a lack of meaningful economic improvement.

One positive constant has been the Federal Reserve, led by Chair Jerome Powell, whose steady and measured approach has maintained credibility amidst a volatile political backdrop.

Conclusion

Forming a definitive market outlook remains challenging amid ongoing policy ambiguity. The administration’s position on tariffs continues to evolve, and with seemingly little internal consensus among President Trump’s advisors, market participants are left parsing conflicting signals.

The weekend’s breakthrough on tariffs undoubtedly provides a hopeful counterbalance to recent uncertainty. If the momentum from the Geneva talks continues, markets may find renewed confidence and economic damage from earlier trade disputes could be mitigated. However, neither China nor the United States has shown consistent transparency or a clear commitment to a long-term trade resolution. Negotiations thus far have been opaque and sporadic, leaving considerable room for renewed conflict. Investors would be wise to treat the news with cautious optimism rather than certainty.

While the economy does appear to be slowing, it is not deteriorating rapidly. Investors should not count on a rate cut at the next Fed meeting, as such a move would require notable resolve given the uncertain backdrop.

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