In early April 2025, the Trump administration announced significant tariffs on our global trading partners, including a 125% levy on Chinese imports and a blanket 10% tariff on goods from most other countries. These measures, intended to protect domestic industries, have introduced inflationary pressure.
In its latest meeting in March, the Federal Reserve expressed concern that the tariffs could increase inflation and the risk of an economic recession. Fed officials are now in the challenging position of trying to balance two opposing goals: keeping interest rates elevated to control inflation while also trying to head off a potential economic slowdown.
The Fed’s Options
While some policymakers are in favor of holding interest rates steady while they assess the tariffs’ economic impact, the larger question remains: What will the Fed do next in 2025 – hold rates steady or implement further cuts?
If the Fed opts to maintain current interest rates, borrowing costs for businesses will remain unchanged. However, with tariffs driving up the cost of imported goods, businesses may face increased costs which could ultimately be passed on to consumers. This scenario may result in stagflation, which occurs when slow economic growth is coupled with rising inflation. Stagflation would certainly weigh on both consumer spending and the demand for products or services.
Should the Fed decide to cut interest rates, borrowing becomes more affordable, which stimulates investment and expansion opportunities for businesses. However, lower rates might not immediately offset the financial pressures from increased tariffs and could contribute to even higher inflation over time. This creates a complex policy environment where monetary easing may support growth in the short term, but risks undermining the Fed’s 2.0% inflation goals. This scenario would mean that while financing may become cheaper, rising costs and pricing uncertainty could still squeeze margins and complicate planning.
Market Expectations
Market expectations regarding rate changes have shifted, now anticipating the Fed to cut rates no earlier than June 2025. However, continued incremental cuts are still priced in for the second half of the year, with only 75 – 100 basis points of reductions projected through year end.
Strategies for Private Business Owners
Given the unpredictability of both monetary policy and trade developments, private business owners should take proactive steps to safeguard and strengthen their operations:
- Monitor Economic Indicators: Stay informed about inflation trends, interest rate decisions, and trade policies to anticipate cost fluctuations and adjust pricing strategies accordingly.
- Evaluate Supply Chains: Assess the impact of tariffs on your supply chain. Exploring alternative suppliers or sourcing domestically might mitigate increased costs.
- Review Financial Strategies: With potential interest rate changes, consider refinancing existing debts to lock in favorable terms.
- Stay Agile: Economic conditions are fluid. Maintaining flexibility in operations and financial planning can help navigate uncertainties effectively.
What to Watch for Next
With the economic outlook in flux, staying informed about key developments can help business owners prepare and adapt. Here are a few critical events and indicators to keep an eye on in the coming months:
- Federal Reserve Meetings: The next Federal Open Market Committee meeting is scheduled for May 6 – 7, with an interest rate decision expected on May 7. Markets will be watching closely for any shifts in policy language or updates to the Fed’s economic projections.
- Inflation Reports: Monthly CPI and PPI reports will be especially important as the Fed gauges whether tariff-related inflation is temporary or more persistent. Look for upcoming releases in mid-months.
- Consumer Spending Trends: Retail sales data and consumer sentiment surveys can offer insight into how rising prices and borrowing costs are affecting demand, especially in discretionary categories.
- Trade and Tariff Developments: Any updates from the Trump administration on new tariffs or exemptions could further impact cost structures and supply chains.
By proactively addressing these areas and closely monitoring key economic indicators, your business can be better positioned to withstand economic fluctuations and make informed decisions that support long-term sustained success amid evolving financial landscapes.
If you have any questions or would like additional information, please contact a member of our Business Advisory Group.