Why markets are going to have to worry about tariffs again soon

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5 hours ago

The market has looked past tariff concerns since the April 9 pause and cooler China tensions.
But as the end of the 90-day negotiation window approaches, the trade war is about to come back into focus.
Inflation has been tame, but that might not last, and the Fed will be confronted with more tough decisions.
The market is breathing a sigh of relief over the ceasefire between Israel and Iran on Tuesday, but investors are barreling toward another issue that sent volatility soaring earlier this year.
In it a note on Monday, Morgan Stanley highlighted that uncertainty related to tariffs remains high across the globe, and investors are nearing a key deadline that could bring the trade war back to the forefront.
On April 9, President Donald Trump announced a 90-day pause on all "reciprocal" tariffs imposed by the US, excepting those on China. As Morgan Stanley notes, July 9 is the next deadline for tariff negotiations. Markets are waiting to learn how Trump will approach this next phase.
There are three chief reasons tariffs could come roaring back into view for investors.
Geopolitics has overshadowed the trade war recently. The Israel-Iran conflict in recent weeks has taken up a lot of investors' focus, but the risks from that event appear to be dwindling. The next shoe to drop with regard to volatility is likely to be the next chapter of the trade war.
Tariffs' effect on inflation may be lagged. Economists caution that the data in recent months showing inflation cooling might not last. That's because the impact of tariffs on prices could be slow to show up, Morgan Stanley said, adding that they see inflation potentially picking up later this summer.
Fed policy could be complicated by the lagged impact of tariffs. Markets—and Trump—have been clamoring for lower interest rates, but if inflation rears its head, that'll be another reason for the Fed and Chairman Jerome Powell to keep rates steady.
Recently, much of the focus on tariffs has centered around the Fed's decision to hold interest rates steady, a decision that President Trump has been highly critical of.
Powell has predicted that tariffs could ultimately lead to higher inflation, stating that the burden will "fall on the end consumer," though several Fed officials have sounded more dovish lately.
But as Morgan Stanley notes, factors related to the trade war are likely to make the Fed's next decision extremely complicated.
"Some have argued, after a soft May CPI print, that the economic impact of tariffs could be benign because of all the "negotiation." We disagree," states chief global economist Seth B. Carpenter.As the analysts note, tariffs often lead to higher inflation after a two to three-month period. Therefore, they are not surprised by the cooler data and predict that even if the US sees the effects this summer, it will be difficult to predict the magnitude and length of the trade war's impact.
"For the Fed, it is precisely this uncertainty that will make understanding the risk of inflation, and thus deciding to cut, a challenge," the analysts wrote.
With pressure rising from both the Federal Reserve and Capitol Hill, Powell and the Fed are facing a complicated landscape, and with no Fed meeting scheduled for August 2025, observers say that officials could be more inclined to act in July to deliver a rate cut.
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