Trump’s Tariffs Create Uncertainty

Late Thursday, President Donald Trump signed an executive order slapping new tariffs ranging from 10% to 41% on imports from dozens of countries. India now faces 25% tariffs, Taiwan 20%, Thailand 19%, and South Korea 15%. Even Canada saw duties rise to 35%, unless covered by USMCA agreements. Mexico was given a 90-day grace period to work out a broader deal.

The markets didn’t take it well. Investors had been hoping for more stability, not another round of economic nationalism. Asian markets plunged in response. The MSCI Asia-Pacific Index (ex-Japan) fell 1.1%, bringing weekly losses to 2.2%, the worst performance since April.* South Korea’s KOSPI dropped 3.5%, and losses spread to Japan, Taiwan, Hong Kong, and mainland China, which is in contrast with gains from the previous week that we wrote about.*

A Painful but Necessary Monetary Policy

To make matters worse, the Federal Reserve isn’t offering a rescue. On Wednesday, the Fed held interest rates steady, and fresh inflation data showed that price pressures are creeping back, driven in part by, ironically, those very same tariffs.

Now the Fed finds itself in a bind. Higher tariffs push up prices, and cutting rates in order to boost the economy would risk stoking inflation even more. That’s why, even as markets wobble, the Fed is staying cautious. The chances of a September rate cut have dropped to just 39%, down from 65% earlier this week, according to the CME’s FedWatch Tool.

The irony is obvious as high interest rates slow down economic growth, but in the face of such erratic and inflationary trade policy, they’re one of the few tools the Fed has left to keep prices in check. It's a lose-lose scenario for the economy where tighter credit conditions hurt consumers and businesses, but letting inflation run wild would hurt even more.

Source: Yahoo Finance

Currency and Bond Markets React

Currency markets quickly picked up on the shift. The U.S. dollar index rose 2.5% this week, its biggest gain since late 2022 as hopes for near-term rate cuts faded.* The Japanese yen dropped sharply, falling 0.8% overnight to 150.7 per dollar, after the Bank of Japan kept its policy unchanged and struck a cautious tone on inflation.*

Bond markets were relatively stable, but also cautious. The 10-year U.S. Treasury yield edged up to 4.38%, while the 2-year yield held at 3.95%.* These levels reflect uncertainty: the economy is clearly under pressure, but policymakers aren't ready to pivot. At least not yet.

Conclusion: No Easy Fix

There’s no sugar-coating it. Investors are navigating extremely dangerous waters. Protectionist trade policy is driving inflation, and the Fed is stuck with the unpleasant task of managing its consequences through tighter monetary policy. High interest rates may be necessary right now, but they’re also dragging on growth, hiring, and corporate investment.

It’s a difficult balancing act, and until trade tensions ease, it’s likely to stay that way.

* Past performance is no guarantee of future results.