Why tariffs might stay higher even with a Trump reset

Bank of America analysts project that tariffs could rise by approximately 5 percentage points, potentially pushing the effective rate to nearly 16%, citing ongoing policy uncertainty and recent Chinese import duty collections nearing 46% in May. This tariff escalation poses significant macroeconomic risks, including a 30 basis point upside to inflation and downside to growth, increasing the likelihood of stagflationary conditions extending into 2026. Consequently, BofA reaffirms its out-of-consensus forecast that the Federal Reserve will likely not cut rates this year.

Analysis

Bank of America analysts project a sustained and potentially escalating tariff environment, with the latest announcements poised to increase the effective rate by approximately five percentage points to nearly 16%. This outlook is supported by recent data, as duties collected on Chinese imports in May reached nearly 46%, surpassing BofA's own 38% estimate. The macroeconomic consequences are significant, as a five-point rate hike is forecast to pose about 30 basis points of upside risk to inflation and an equivalent downside risk to economic growth. These pressures heighten the probability of stagflationary conditions extending into 2026. Consequently, BofA has reiterated its out-of-consensus forecast that these inflationary challenges will likely compel the Federal Reserve to remain on hold, forgoing any interest rate cuts for the remainder of the year.

Key Decisions for Investors

• Investors should re-evaluate positions heavily dependent on near-term monetary easing, as the analysis posits a 'frozen' Federal Reserve with no rate cuts this year, contrary to some market expectations.
• Scrutinize portfolio holdings with significant supply chain exposure to China, as the projected increase in the effective tariff rate presents a direct threat to profit margins.
• Consider adjusting allocations to account for heightened stagflationary risk, potentially favoring assets that exhibit resilience to persistent inflation and slowing economic growth.
• Monitor upcoming trade policy announcements and official tariff collection data closely, as these will be key indicators validating or contradicting the high-tariff, no-rate-cut thesis.