Trump tariff extension leaves banks, Fed in limbo

President Donald Trump’s sweeping tariff proposals have been put on hold for another month, giving banks and industries more time to brace for impact while also prolonging the uncertainty that has hung over the economy for the past three months.

Trump announced the postponement of the so-called “reciprocal tariffs” — which were first announced in April and that are meant to apply higher import taxes on countries with larger trade surpluses with the U.S. — via Truth Social posts on Monday and Tuesday. The announcements came shortly before the expiration of a 90-day pause on the levies.

For banks, the new Aug. 1 deadline extends both the good and the bad elements of the status quo. On the good side of the ledger, tariffs will not be soaring back up to their April 2 levels — at least for the time being — bringing a sigh of relief to many commercial banks that work with importers. But the new pause also confers no long-term certainty to the global economic picture, which is anathema to many businesses.

“The window for deal-making is extended, but so too is the uncertainty that complicates capital spending decisions,” wrote Wells Fargo economists Shannon Grein and Tim Quinlan.

Meanwhile, the delayed impact of tariffs adds to the mounting pressures on the Federal Reserve to adjust monetary policy to evolving economic conditions. 

Officials at the central bank have largely favored holding off on lowering rates until they know the full impact of restrictive trade policies. Yet, with scant evidence of tariff-induced inflation and growing concerns about the strength of the economy and labor market, some — including a handful of Fed policymakers — are calling for rates to be lowered sooner rather than later.

“They’re very much stuck between a rock and a hard place,” said Mark Zandi, chief economist for Moody’s Analytics. “Inflation is the rock, growth is the hard place.”

Economic outlook

The stated purpose for the initial pause was to give countries time to hash out new agreements to balance their trade flows and secure lower tariff rates. Trump and his top cabinet members predicted they would ink 90 deals in 90 days.

Instead, the administration has agreed, in principle, on one deal with the United Kingdom and is reportedly close to a deal with Vietnam. Treasury Secretary Scott Bessent also led an envoy that was able to strike a temporary agreement with China that lowered its tariff policy from prohibitively high levels of more than 100% to between 40% and 55%.

Peter Earle, director of economics and economic freedom at the American Institute for Economic Research, a libertarian think tank, said the administration’s vision of other countries competing with one another to be the first to ink new trade deals appears to have backfired.

“It was expected that nations would beat a path to the White House to make deals, but they’ve seen that either delaying does not penalize them or they see that showing up at the door didn’t do anything to help them,” Earle said. “As tariffs go into place and they start to put pressure on prices in the United States, maybe nations think they don’t need to negotiate at all. Maybe they can get a good deal if they just outlast the American public’s tolerance for higher prices.”

For now, most countries remain subject to the 10% tariff rate imposed this past spring, well above the effective tariff rate of 2.5% that was in place at the beginning of the year, but short of the reciprocal rates, which would have seen cumulative rates move well above 20%.

Several key U.S. trading partners face higher tariffs. China’s effective rate is 31%, Mexico’s is 15% and Canada’s is 12%. These elevated levies are, in part, because of the Trump administration’s efforts to use restrictive trade policies to meet other policy objectives, such as stemming the flow of drugs into the country and cracking down on unauthorized immigration.

On paper, the overall trade-weighted tariff rate is 14%, but some say the actual rate being collected is lower. Moody’s estimates the effective tariff rate is closer to 8%, which Zandi said accounts for imports of tariff-exempted goods and efforts by U.S. importers to avoid counterparties in highly-sanctioned countries. 

“You would think it would be a lot higher than that given all the drama and all the stated tariffs — 25% this, 40% that, 140% this — it’s all over the map,” Zandi said. “But the reality of it is we’re at 8% and, I have to say, that’s less than I would have anticipated at this point in time.”

Still, new tariff rates have accounted for roughly $100 billion of increased revenue so far this year and are projected to add between $2 trillion and $2.5 trillion of revenue during the next decade. 

Some economists attribute the minimal increase in the effective tariff rate and the negligible uptick in consumer prices observed thus far to two things: a surge of pre-tariff imports during the first quarter of the year, as an effort to front-run higher levies, and the ability for businesses to absorb those higher costs without passing them along to consumers. 

“Wholesalers and retailers are cutting their profit margins to be able to sell to you at a not too high price,” said Komal Sri-Kumar, a senior fellow at the Milken Institute and independent macroeconomic consultant. “With the passage of time, they will not be able to do that.”

Sri-Kumar said he initially expected tariff costs to be reflected in inflation indexes during the second half of this year. With the latest extension, he said, that could be pushed off until the end of this year or the beginning of 2026.

Barring a sharp decline in next week’s June Consumer Price Index, the Fed is unlikely to lower rates at this month’s Federal Open Market Committee Meeting. Still, a longer delay before the full brunt of tariffs are felt could create divisions within the Fed. 

Fed Vice Chair for Supervision Michelle Bowman and Fed Gov. Christopher Waller have both advocated cutting rates within the next two meetings, arguing that a more accommodative policy is needed to protect the labor market. 

“Ultimately, slower growth is going to outweigh inflation and they’re going to start cutting rates again …that’s the likely path,” Zandi said. “So, you would expect some board members to start talking about rate cuts sooner rather than later, and I think that’s what we’re observing.”

But, Sri-Kumar said there is a risk in cutting rates just as prices are about to rise, even if that jump in prices could prove to be a one-time event. He said he expects Fed Chair Jerome Powell to continue taking a conservative approach to tariff-induced inflation in light of the Fed’s recent experience with supposedly transitory inflation.

“In the case of Powell, it’s once bitten twice shy,” he said. “If you’ve gone through this once, you can’t afford to make the mistake again.”

The impact on banks

Even before the latest extension was announced, many banks expected the uncertainty over U.S. trade policy to hurt credit conditions. On July 3, the American Bankers Association reported that most bank economists expected both consumer and business credit quality to deteriorate over the next six months.

“Tariff-related uncertainty remains a headwind to credit conditions and broader economic growth,” Sayee Srinivasan, the ABA’s chief economist, said in a statement. “‘Hard data’ suggest the economy remains on solid footing, but consumer and business sentiment indicate that policy uncertainty remains elevated and is causing some firms and households to adopt a cautious approach to hiring, spending and investment.”

In the aftermath of Trump’s April 2 tariff announcements, many banks observed a slowdown in mergers and acquisitions, both in their own industry and among their clients. Bruce Van Saun, CEO of Citizens Financial Group, told American Banker last month that “things got really stuck for about a month” in April, although he later noticed a “thaw.” Time will tell whether another jump in tariffs would cause the same chilling effect.

And still looming over the economy, as it has since April 2, is the possibility of a tariff-induced recession. Jonathan Pingle, the chief U.S. economist at UBS, warned that if the levies do “snap back” to their original heights after Aug. 1, UBS would lower its growth forecast for the U.S. economy from 0.9% to 0.6%.

“That’s a range of growth that’s pretty sluggish in the U.S., with a pretty weak second half,” Pingle said at a panel discussion hosted by UBS on Tuesday. “Under that scenario, recession probabilities are going to rise, and it’s going to feel like pretty sluggish growth.”

The other threat is spiraling inflation. If importers pass the costs of higher tariffs onto their customers, Pingle noted, competitors using non-imported materials may raise their prices as well, simply because they can get away with it.

“There’s a certain incentive for domestic competitors to raise their prices as well, because they don’t need to raise their prices as much, and they can still take market share,” Pingle said. “So you could actually have price increases in the economy that are over and above what the tariff pass-through might be.”

But as some banks pointed out, the most damaging scenarios have not yet come to pass. Negotiations are still continuing, tariffs have not soared back up to their April 2 levels, and the most punishing levies have never stuck for long.

“A risk-off would be generated by a higher tariff rate that is expected to be sustained against a major trading partner,” Andrew Hollenhorst, Citi’s chief economist, wrote in a report on Tuesday.

Ultimately, Earle said, a world with significantly higher tariffs will bring a mix of good and bad. On one hand, it could result in a supply shock that leads to a decline in economic activity. On the other hand, he added, such a shift would also steepen the yield curve, driving short-term rates lower and long-term rates higher, thus boosting bank profitability. 

Earle said higher trade barriers will also alter the investment landscape in favor of the financial sector, as investors move away from import-driven industries. 

“Sector rotation is going to find its way into financials. So many areas are going to be hit by tariffs that investors are going to be looking for alternatives,” Earle said. “Tariff finance is also a very lucrative business.”