Tariffs and Tensions

March 31, 2025

Financial Markets

This past week proved challenging for investors and analysts, and it appears the difficulties could persist into the coming week. Equity markets moved lower, not because corporate earnings missed expectations, but due to economic data showing signs of a slowdown. To further complicate matters, the President announced a new round of tariffs.

This combination of slowing economic momentum and rising policy uncertainty is weighing on investor sentiment. Investors are wondering whether the economic softening is temporary or the beginning of a more pronounced downturn. Markets tend to dislike uncertainty, and the volatility in both the magnitude and direction of trade policy has not been well received.

Economics

The central theme this week was trade. The President announced two new tariffs, escalating tensions at a time when markets were already on edge. These measures underscore the administration’s broader push toward a more assertive trade policy. The cumulative effect suggests that the United States is inching closer to a full-scale trade conflict—one that now includes even some of its closest allies. If these tariffs go into effect, it could exacerbate inflationary pressures by driving up import prices.

In addition to tariffs, the administration has initiated a comprehensive effort to reduce the size of the federal government. While such a move may appeal to certain fiscal conservatives, the abrupt implementation raises concerns about near-term economic disruption. Large-scale cuts, particularly those executed quickly, are unlikely to be frictionless and will further weigh on economic growth if spending cuts outpace efficiency gains.

Even now, inflation remains stubbornly elevated, putting the Federal Reserve in a difficult position. The Fed’s dual mandate to maintain both full employment and stable prices is being put to the test. Cost-push inflation triggered by higher input prices, such as tariffs, is not easily remedied through monetary policy.

The effects of deep spending cuts, if implemented rapidly, remain challenging to predict. However, the speed and scope of these policies suggest that disruption to government services and broader economic activity is quite likely.

Conclusion

It is important to note that many factors remain fluid. The President has made tariff threats in the past without always following through, and occasional periods of slower economic growth need not result in a crisis.

Still, current signals point to growing uncertainty. Trade policy, inflation, and fiscal contraction are converging in ways that could create headwinds, with the risk of a recession increasing. Investors should be prepared for heightened volatility and remain focused on developments that will shape the economic landscape in the months ahead.

Looking to 2026, the upcoming midterm elections will influence both policy momentum and investor sentiment. Until there is more clarity, markets are likely to remain volatile as participants respond to shifting economic signals and ever-changing policy announcements.

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