Inflation & Tariffs

On April 2, the President’s tariff announcement came in at the higher end of the range. The magnitude of the tariffs is causing a risk off in markets and a flight to quality causing interest rates to rally. Tariffs will also present an inflationary bump as they are implemented and a corresponding drag on consumer purchasing power. The determination from the current administration to implement these tariffs will continue to weigh on market sentiment and the economy. Tariffs will have the most impact over the coming quarters with a one-time bump in inflation, a negative impact on the consumer, and a positive impact to net exports.

Our Take: While the Federal Reserve (Fed) will remain on hold until there is more clarity on the impact from tariffs, we do think that the one-time impact on inflation is manageable, and may allow the Fed to look through the near-term inflation numbers and focus on the implications for growth and employment. Our Global Liquidity products continue to look for opportunities to add short high-quality securities outyielding SOFR (~4.35%).

Employment and Immigration

The employment market is more balanced than it has been over the past few years as evidenced in the Job Openings and Labor Turnover Survey (JOLTS), which has shown that job openings are well off their highs and quit rates are trending lower. The job market is still historically healthy, but the market is anxiously awaiting the impact of the DOGE cuts on unemployment data as well as the potential impact from new immigration policies.

New limitations on immigration and deportations will be a headwind for labor supply and could present inflationary pressures in certain sectors. Limiting population growth will also exert a negative impulse on consumption growth over the coming quarters.

Our Take: In Global Liquidity, we will continue to monitor the high-frequency data (e.g., weekly initial jobless claims) to assess trends in the labor market. The trends show signs of a cooling employment market but not one that is in a recession. Our Global Liquidity portfolio managers have worked closely with our credit research analysts to ensure the consumer sensitive credit holdings can withstand a downturn in the employment market.

Fiscal Stimulus and Deregulation

Up to this point, government policy developments year-to-date have originated from the executive branch. At some point later in the year, Congressional action will step into the spotlight. In particular, the 2017 Tax Cuts and Jobs Act (TCJA) will sunset unless extended. Congress will also likely consider several additional tax proposals that the President proposed on the campaign trail (e.g., state and local tax (SALT) deduction changes, taxation of tip income). With any TCJA extension, the Federal net debt will continue to rise and the market may demand higher interest rates for longer-term U.S. Treasury debt.

In an ideal scenario, tariff revenues and reduced government spending via DOGE initiatives will smooth over negotiations of the TCJA extension and other Trump-proposed tax plans from the campaign. The various proposed tax policy adjustments are estimated to add $1 - $5 trillion to the deficit.

The extension of the TCJA would avoid a $4 trillion fiscal cliff and would provide fiscal thrust to the economy. Any additional tax cuts may be difficult to stomach unless the tariff revenues and DOGE savings exceed expectations. In addition to the TCJA extension there may be some smaller wins in the SALT relief or taxes on tips that can provide some fiscal stimulus. The administration may have to rely on the benefits of loosening regulation to foster business growth.

Our Take: We believe all of these should be positive for economic growth and will probably only materialize in the second half of the year. Until then, the economy will be weighed down by the uncertainty of the anti-growth policies that are being implemented in the near-term. Global Liquidity is increasingly getting concerned that the magnitude of the fiscal thrust may not be enough to keep the economy out of recession.

FOMC

The Fed is on pause, for now, as they assess the impact of the proposed policies on inflation, growth, and the employment market. The FOMC is seeing movement in the soft data via consumer and business sentiment, but the Committee will want confirmation of weakness in the hard data before rate cuts are contemplated. The evolution of forward inflation expectation data (both market-based and survey-based measures) will also be important factors for the Committee as they consider the evolution of monetary policy.

Our Take: Global Liquidity believes the Fed will cut rates 3 times this year with a risk to more cuts given the magnitude of the tariffs. We expect growth to slow to roughly 1% real GDP growth in 2025, with slower growth in the first half of the year followed by higher growth in the second half. This outcome will depend on the timing and implementation of the range of policy proposals being considered.

Conclusion

Uncertainty has been the key financial market theme so far in 2025. Policy actions on tariffs, DOGE, and immigration is weighing on the risk markets, consumer and business confidence, and the broader economy. Government spending cuts will slow GDP growth and put downward pressure on the labor market. Tariff and immigration policies will provide an inflationary impulse to the economy while slowing down consumer spending which is roughly two thirds of U.S. economic output. The TCJA extension later in the year would avoid a fiscal cliff impact, but as an extension of existing policy, we don’t expect significant positive impact on the consumer. Any additional tax relief beyond TCJA may be challenging to implement if the bond market continues to push back on the growing government deficit. These cross currents between inflationary pressures and slowing economic growth will keep the Fed on hold for now, but we believe the FOMC will react with easier monetary policy if hard data starts to weaken materially and consistently. Money Market Fund (MMF) yields remain attractive given high policy rates for the near-term, and the level of uncertainty which clouds the forward outlook for growth, inflation and interest rates. Investors with a slightly longer (6-12 month) investment horizon should consider an ultra-short duration portfolio which will deliver more total return from duration when the Fed ultimately takes the next step on easier monetary policy. Global Liquidity is ready to partner with you on the full spectrum of cash-management strategies for this uncertain investment environment.

Global Liquidity products offer attractive yields and total return outcomes across multiple market scenarios to help you manage your operating, strategic and reserve cash. For more details on those solutions, please visit our Funds page to learn more.

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