Thoughts on Tariffs, Interest Rates and the Market
May 9, 2025
By Robert Wiedemer
Tariff Terror Has Only Affected the Financial Markets – That’s about to Change
The market is getting more comfortable with progress on tariffs. At the end of the first week of May, the market has kept all of its gains after the big rally the last half of April. The deal with Britain and upcoming talks this weekend with China have helped keep the mood more positive.
However, we are clearly not out of the woods on tariffs. The deals have only just begun. Although the process may be slow, I suspect that President Trump will continue to make deals and if he isn’t finished by the end of his 90 day pause, he will extend the pause as needed.
Most importantly, another reason to negotiate deals is about to hit President Trump: Empty shelves. Imports from China have collapsed since most retailers have decided not to pay tariffs in hopes that Trump will reduce tariffs soon. I think it is a good decision on the part of retailers. Empty shelves will bring discomfort to many of Trump’s supporters. Pain in the stock market is easier to ignore than the pain hitting tens of millions of people who voted for Trump.
As I have said before, Trump is not as immune to this pressure as some market analysts think. In fact, he is already showing great concern over the upcoming Congressional elections. He is working hard with other members of the GOP to recruit and support candidates who will win, whether they are MAGA or not. Trump is focused on winning. Grumpy voters won’t make him a winner.
Hence, I expect the pressure to make deals, especially with China, will increase. And, to the extent deals aren’t finished, postponement of tariffs will be a likely option for many countries. As I said in my March 10 Macro Outlook, I think that Tariff Terror will, for the most part, be over in a few months.
Remember, the stock market has already recovered all the losses since Independence Day (April 2), the announcement of Trump’s massive tariffs.
President Trump’s focus will move on to tax cuts. It will be difficult to pass a tax cut bill, but I do think a deal will be made – hopefully this summer. Tax cuts will excite the market and likely increase the deficit which will further stimulate the economy.
Interest Rate Cuts Not Happening and Not Relevant
As we saw from this week’s Fed meeting, the Fed’s concern over possible inflation, at least in part due to tariffs, make it unlikely we will see many rate cuts this year, if any. Even if we do see a couple cuts, they are not relevant. As I have said so many times before, cuts to the overnight rate are unimportant. Those are the rate cuts that the Fed announces at its periodic meetings.
Cuts to the overnight interest rate don’t drive the economy. Cuts to the long-term rate (10 year rate) drive the economy. Those cuts can only come from printing more money and the Fed is very reluctant to do that. They are trying to print less, not more.
They may be forced to change that stance later this year, but only if long-term rates start to move up to 5%. Either way, whether the Fed is forced to print later this year or early next year, Trump will undoubtedly appoint a money printing Fed Chair in May 2026. The new Chair may not print enough to lower rates a lot, but he/she can certainly keep them from going too high.
And, no, contrary to what so many market analysts and economists seem to want, we are not going to get a big recession that forces the Fed to dramatically cut rates.
So, no change to my long term outlook for the rest of the year. In fact, events are playing out much as I suspected in March. I can’t predict the short term as well as the long term, but it doesn’t really matter. We are invested for what will happen this year, not this month.