Tariffs Rise, Job Gains Stall: Fed Faces Growing Dilemma — Evening Brief – 08.01.25 

The U.S. administration’s latest tariff announcement marks a sharp escalation in global trade tensions, reviving the aggressive protectionist posture first outlined in April. With a new global average tariff rate rising to 15.2% from 13.3%, the implications are both inflationary and contractionary. Countries with trade surpluses with the U.S. now face duties of 15% or more, while a new 10% global minimum tariff applies broadly. Notably, Canada saw its general tariff rate hiked to 35% from 25%, injecting fresh strain into already fragile bilateral relations. Mexico, by contrast, received a 90-day reprieve, offering a narrow diplomatic window to negotiate. 

The return of heavy-handed trade policies complicates the macroeconomic outlook and clouds visibility for both policymakers and investors. While the June PCE data suggested that inflation is inching higher—with headline PCE up 2.6% year-over-year, from 2.4% in May, and core PCE holding at 2.8%—the reemergence of tariffs raises concerns that cost-push inflation could accelerate further. These pricing pressures, layered on top of weaker global demand, present a new challenge: imported inflation without the domestic growth to justify it. Former Governor of the Reserve Bank of India and IMF chief economist Raghuram Rajan described it bluntly, calling the tariffs a “serious demand shock” for the rest of the world and warning of a looming global slowdown that could trigger rate cuts by other central banks. 

At home, the Fed’s dilemma is deepening. Friday’s July jobs report was dismal, showing the U.S. added only 73,000 jobs, well below the 110,000 forecast, while May and June were revised down by a combined 258,000. The unemployment rate ticked up to 4.2%, and for the first time in this cycle, the data has materially weakened the Fed’s high ground on labor market resilience. According to Chair Jay Powell, the Fed is now watching unemployment trends more closely than headline job gains, a subtle but significant shift in focus that the July data may accelerate. 

Market reaction was swift: Treasury yields dropped sharply across the curve, with the 2-year through 7-year notes falling by at least 10 basis points, as traders increasingly price in a 25-basis-point rate cut in September. Fed funds futures are now assigning a rising probability to that outcome, a stark turnaround from the hawkish tone at Powell’s press conference. The report also gives weight to the July meeting dissents from Fed Governors Christopher Waller and Michelle Bowman, who advocated for a quarter-point cut and emphasized the need to rebalance the Fed’s dual mandate toward full employment. 

In sum, the Fed is being pulled in opposite directions: tariffs risk rekindling inflation, while labor market weakness argues for urgent easing. If inflation accelerates due to tariff-driven input costs while demand cools globally, the Fed may be forced into a policy corner—cutting rates in response to deteriorating employment even as headline prices remain sticky. With market confidence now fragile and political pressures building, the September FOMC meeting could mark a pivotal moment in whether the Fed opts to act preemptively—or risks being seen as too late once again.