Recent developments in tariffs and fiscal policy—coupled with a unique political backdrop—have reinforced our central view: the Federal Reserve is likely to hold rates steady through the summer.
The Recent Tariff Update
Despite a partial retreat from the edge of an all-out trade war with China, tariffs remain highly elevated. With a 30% rate on China and a 10% blanket tariff elsewhere, the average U.S. tariff rate has climbed to roughly 13%, up from just 3% at the start of the trade conflict. This is a sharp reversal from decades of trade liberalization and would once have been considered extreme protectionism.
What’s more, this isn’t a détente. China’s retaliatory tariffs were a direct response to U.S. actions and have only been pared back after the U.S. blinked first. While the latest move is officially a 90 day pause, there has been so many new announcements with little preparation and all tariffs have to have a large error term associated with them right now. This ambiguity only adds to the economic uncertainty businesses must navigate. Even if trade flows resume today, the supply chain disruption may mean many goods which should have been ordered in the last three months won’t arrive in time to avoid near-term shortages and elevated prices this summer and fall.
Economic Policy Signals: Tariffs and Fiscal Spending
Right now, tariffs are the primary announced change to the economic landscape, but their impact has yet to fully materialize. Most mainstream analysis agrees that, if implemented as outlined, these tariffs will act as a modest drag on growth and will push prices somewhat higher. Until that slowdown is more visible in the data, the Fed has reason to wait and observe rather than act preemptively.
On the fiscal side, the picture is mixed. There have been no significant effects yet of widely touted spending cuts, but in reality federal spending is currently running about 6% above last year’s pace, according to the Hamilton Project’s real-time tracker. However, fiscal policy plans remain inconsistent. The administration is simultaneously proposing cuts to income transfers like Medicaid—affecting low-income consumers with a high propensity to spend—while also boosting incomes for wealthier Americans. On balance, the result may still be net fiscal stimulus, but the redistribution could dull its macroeconomic punch.
The Political Shadow
Overlaying all of this is the unusual political pressure on the Fed. President Trump has publicly criticized Fed Chair Jerome Powell while also confirming he intends to let Powell serve out his term through May 2026. This mixture of hostility and hands-off commitment adds a layer of uncertainty to Fed decision-making. While central banks are designed to operate independently, political headwinds could influence both market perceptions and policy reactions.
Conclusion
With tariff effects still filtering through the economy, fiscal stimulus looking uneven, and political risk clouding the Fed’s independence, the case for patience is compelling. Absent a sudden and sharp deterioration in growth or inflation, we believe the Fed will remain on hold until the fall, allowing time for these crosscurrents to clarify.
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