The tariff announcement and its potential impact on the economy

President Trump recently announced a broad-based tariff of 10%, plus incremental tariffs on dozens of US trading partners. The effective tariff rate now moves to the mid-20% range, up from roughly 3% at the beginning of the year. The magnitude of the announced tariffs was more aggressive than most had expected, certainly higher than the assumptions on Wall Street. As such, financial markets are reacting negatively. In early Thursday trading, equity indexes are down 4%–6%, bonds are strongly rallying in a flight to safety, interest rates are falling (10Y down 0.17%), and one-year inflation break-even rates are up 0.3%.

Essentially, the markets are pricing in a few notable assumption adjustments. First, slower economic growth and lower earnings levels, by extension. Second, higher inflation. We’re still working through these new tariff levels, but our estimates show a roughly 1% hit to US GDP growth over 12 months and a 1.5%–2% increase in inflation. Given these assumptions, it's safe to conclude that the Fed is in a more difficult position today relative to yesterday given their dual mandate of employment and price stability. All else equal, slower growth (i.e., a weaker labor market) would cause more accommodation while higher inflation would lean toward restrictiveness. Our working assumption is that the Fed anchors to longer-run inflation expectations (i.e., longer than one year) which have not moved much overnight or so far in 2025. With anchored longer-term expectations, the Fed would have more air cover to cut rates if the economy were to soften. We came into  yesterday assuming three cuts in 2025 and are now leaning toward four.

It’s important to note, though, that we are still in a highly uncertain environment. Many questions remain, not least of which being how our trade partners respond—do they negotiate or reciprocate? Also, the impact on the economy is not clear. Directionally, we think the consensus for lower growth and higher inflation is accurate, but the magnitude is unclear.

From an asset allocation standpoint, diversification should continue to prove beneficial as it has over time. While US stocks are down YTD, non-US stocks came into yesterday’s announcement notably positive. Bonds, too, have been particularly helpful as have private alternatives. While dramatic swings in public markets can be unsettling, we’d discourage any large adjustments to asset allocations built for the long term. For those with cash to deploy into a long-term allocation, the volatility evident today may present a valuable entry point (appreciating that we don’t know how the near term will play out).  We will have more perspectives as news hits and markets adjust.