The relative calm in financial markets following April’s tariff pause may soon dissipate as investors face a July deadline that could reignite trade tensions.
Geopolitical concerns, including the recent Israel-Iran ceasefire, have dominated headlines, market participants must prepare for the potential resurgence of tariff-related volatility.
Morgan Stanley’s recent report underscores the continued uncertainty surrounding global trade policy. With President Trump’s 90-day tariff suspension set to expire on July 9, markets eagerly await clarity on the administration’s next moves, particularly regarding China. Here are three key reasons tariffs may reemerge as a critical issue for investors:
1. Geopolitical Focus Shifting Back to Trade
The recent focus on Middle Eastern conflicts diverted attention from the trade war, but this lull may be short-lived. As tensions ease, market volatility could spike again as negotiations near the July deadline. Trade disputes have historically served as significant market disruptors, and the uncertainty surrounding U.S.-China relations remains a pivotal concern.
2. Inflationary Pressures on the Horizon
While inflation has stayed subdued in recent months, the delayed effects of tariffs could challenge this trend. Economists caution that tariff-related cost increases often take time to permeate through supply chains and consumer prices. Morgan Stanley analysts suggest inflation could tick upward later this summer, complicating the Federal Reserve’s already delicate balancing act.
3. Complexities in Federal Reserve Policy
Tariffs present a unique challenge for the Federal Reserve, which faces mounting pressure to lower interest rates. Although a soft May Consumer Price Index (CPI) report suggested manageable inflation, Morgan Stanley’s chief global economist, Seth B. Carpenter, warns this may be misleading. The lagged inflationary impact of tariffs could surface just as the Fed grapples with policy decisions in a constrained timeline.
Chairman Jerome Powell has acknowledged the potential for tariffs to elevate inflation, emphasizing that the end consumer often bears the brunt of these costs. However, dovish sentiments among some Fed officials reflect the difficulty of navigating this uncertain landscape. As the July Federal Open Market Committee (FOMC) meeting approaches, the lack of an August session heightens the stakes for policymakers to act decisively.
Trade War Scenarios: Economic Implications
Morgan Stanley analysts reject the notion that tariff impacts are benign or merely negotiation tactics. Instead, they predict an inflation uptick with a two-to-three-month delay, suggesting the effects of prior trade policies may become more pronounced during the summer. This timeline aligns with key market events, amplifying the challenge of forecasting the economic fallout.
“For the Fed, it is precisely this uncertainty that will make understanding the risk of inflation, and thus deciding to cut, a challenge,” Morgan Stanley wrote in their report. Such unpredictability complicates the Fed’s mandate, particularly with political pressures from both Capitol Hill and the White House to stimulate growth through rate cuts.
Investor Strategies Amid Tariff Risks
With market dynamics in flux, wealth advisors and RIAs should guide clients toward resilient strategies that account for potential tariff-driven volatility. Diversification across asset classes, sectors, and geographies can help mitigate risks associated with a prolonged trade conflict. Additionally, focusing on inflation-protected securities or companies with strong pricing power may provide a hedge against rising costs.
While the trade war’s next chapter remains unwritten, its impact on inflation, Fed policy, and market stability underscores the need for proactive risk management. Advisors should remain vigilant, balancing near-term opportunities with long-term portfolio resilience as the July tariff deadline looms.
