Trump, Powell & Rates: Tariffs On, Tariffs Off

WisdomTree analysts anticipate headline-driven volatility through July due to fluctuating trade tariffs and uncertainty surrounding a major tax bill, but advise investors to look beyond the noise as these issues are likely to be resolved in the coming months. Despite political pressure, the Federal Reserve is expected to remain data-dependent, with September being the earliest point for potential policy changes; recent Fed commentary suggests heightened uncertainty with risks for both higher unemployment and inflation. Treasury markets have stabilized after initial selling following Moody’s downgrade and passage of the One Big Beautiful Bill, indicating solid investor demand.

Analysis

The near-term market landscape is expected to be characterized by significant headline-driven volatility through July, primarily stemming from fluctuating U.S. trade policies, notably regarding China and the EU, and the ongoing legislative process of a major tax bill, referred to as the "One Big Beautiful Bill." Key aspects of this bill, such as the State and Local Tax (SALT) deduction cap, currently proposed at $40,000, will be critical in determining its impact on consumer stimulus into 2026. Despite political overtures, including a direct meeting between President Trump and Fed Chair Powell, the Federal Reserve remains steadfast in its commitment to data-dependent monetary policy, with September emerging as the earliest feasible timeframe for any policy adjustments. Recent Federal Reserve communications indicate heightened uncertainty, acknowledging risks of both higher unemployment and inflation, with the upcoming June 18 Summary of Economic Projections pivotal in clarifying the outlook, particularly whether the median forecast will maintain two rate cuts or shift to one for the year. Contrary to concerns following Moody's downgrade and the tax bill's passage, U.S. Treasury markets have demonstrated stability, with 10 and 30-year yields declining a few basis points from two weeks prior, supported by solid domestic and foreign demand in recent auctions, suggesting fears of a substantial bond sell-off are likely overstated. Consumer spending has remained resilient, evidenced by strong earnings from retailers like Costco (COST) and Ulta (ULTA), indicating that tariffs have not yet tangibly dampened U.S. consumer activity, despite some surveys pointing to deteriorating sentiment. These current uncertainties surrounding tariffs, with a 90-day deadline for tariff delays, and the tax bill, expected to be resolved over the summer, are temporary, and underlying resolutions are anticipated in the coming months.

Key Decisions for Investors

• Investors should prepare for heightened market volatility through July driven by trade policy headlines and tax bill negotiations, focusing on underlying resolutions expected in the subsequent months.
• Monitor the Federal Reserve's communications closely, particularly the June 18 Summary of Economic Projections, as September is flagged as the earliest potential inflection point for data-dependent rate decisions, with one or two cuts anticipated this year.
• Re-evaluate concerns about a U.S. Treasury sell-off, as recent market stability and solid auction demand suggest underlying strength, despite events like Moody's downgrade.
• Track consumer spending indicators and retail sector performance (e.g., COST, ULTA) as they currently show resilience against tariff impacts, but remain sensitive to the final form of the tax bill and its consumer stimulus effects.
• Consider adopting a strategy that looks through short-term noise, as the primary drivers of current uncertainty—tariffs and the tax bill—are expected to reach clearer outcomes within the next few months.