Are buoyant markets due for a reality check?
U.S. Tariffs: Markets Stay Calm, But Inflation and Stagflation Risks Loom
Global markets have so far shrugged off the latest round of U.S. tariffs, a stark contrast to the panic selling that followed the Liberation Day reciprocal tariffs announcement. But beneath the calm, questions are piling up. With higher tariff rates imposed on August 7, 2025, the real economic impact has yet to hit. Is Wall Street trading with blinders on, betting on political reversals, or simply hoping the fallout will be contained?
NAS100 Weekly Chart
Why the Calm May Be Misleading
Is this the calm before the inevitable storm?
- Jobs Market Softening and Sticky Inflation
Early signs point to slower job growth combined with persistent inflation. If this trend continues, the Federal Reserve may face a policy dilemma as cutting rates to support growth could risk fueling inflation, especially if tariffs push prices higher.
- Betting on a Trump Tariff Reversal?
Some traders may be betting on the White House eventually reducing tariff rates to more manageable levels. But Commerce Secretary Lutnick recently signaled the opposite, stating tariffs could generate $50 billion per month in revenue, a clear incentive to keep them in place.
Fed’s Rate Cut Dilemma
Market expectations for a September 2025 Fed rate cut are near certain. Yet Atlanta Fed President Raphael Bostic warned that the full effects of tariffs will take 6–12 months to filter through the economy. If growth slows while inflation rises, a potential stagflation scenario (although still not the consensus view), the Fed’s policy path becomes far less predictable.
Who Ultimately Pays the Tariff Bill?
So far, importers, exporters, and manufacturers have shouldered most of the cost. But businesses are not charities and logic says it’s only a matter of time before higher costs are passed on to the American consumer.
Once stockpiled inventory and goods shipped before August 7 are sold, companies will face a choice:
- Absorb costs and shrink profit margins, or
- Raise prices and risk reduced demand.
Logic suggests the latter will dominate.
Tariff Rules for Goods in Transit
Goods already loaded onto a vessel before August 7, 2025 are exempt from the new country-specific tariffs and remain subject to the previous 10% general reciprocal tariff provided they are entered for consumption or withdrawn from warehouse by October 5, 2025.
However, if U.S. Customs and Border Protection determines goods were transshipped to disguise their origin and evade tariffs, they will face a 40% tariff plus penalties. Transshipping, routing goods through third countries to mask their true origin, is a well-known tactic in trade disputes.
Hooked on Tariff Revenue
As long as the administration views tariffs as a dependable revenue stream, higher rates are unlikely to disappear. That means inflationary pressure will persist, and the ultimate burden will fall on consumers.
Market Reality Check Ahead?
With U.S. stock markets at or near record highs, traders have so far ignored the long-term risks of tariff-driven inflation and slowing growth. But if the impact proves more of a slow trickle than a one-time shock, the adjustment could be both delayed and painful. Betting against the current optimism has been costly but that doesn’t mean the eventual reality check won’t come.
