Making Sense: May Q&A

Making Sense

Q&A | Trade Policy: Impact on Investors and Business Owners

Recorded: May 13, 2025

Amy: Hi, I'm Amy Thomas, a strategist here at First Citizens Bank. Today is Tuesday, May 13, 2025. I'm joined by our market and economic research team, Phillip Neuhart and Blake Taylor, to talk about some of the questions we're hearing most often from clients.

By the way, the information you're about to hear are the views and opinions of only the authors at the time of recording. Also, this is our first Making Sense episode that will be available across major platforms for podcasting if you'd rather listen to this in audio format.

Blake, there have been a ton of data points and tariff headlines and trade concerns. Why don't we take a step back and see where we are today?

Blake: Well today the tariff rate is considerably lower than it was 6 weeks ago when this big tranche of tariffs was announced, but it is still way higher than it was at the start of last year. And I think that's the short answer to the question.

So in early April, when the White House announced new tariffs, the average tariff rate that the US charges on its imports rose from about 2.5% to over 25%. And that constituted the biggest increase in tariffs in over 100 years, actually back to before the US started collecting an income tax back in 1913.

And these tariffs were made up of four main sets of new import taxes. First, there was a broad 10% baseline tariff on everything coming into the United States—except from Canada and Mexico, which got an exception. And then second, on top of that, the US imposed a steeper punitive tax that they called reciprocal tariffs that sometimes added up to as high as 50% for some countries. That was on a country-by-country basis.

And then third, the US also imposed sector-by-sector tariffs, hitting the auto sector and certain metals like steel and aluminum. And then lastly and most significantly, there were very high tariffs imposed on imports coming in from China that reached as high as 145%.

So since early April, we have seen a significant step back overall in two of these categories. First, after only a week, the US wiped off the so-called reciprocal tariffs that hit individual countries at a higher rate and just left that 10% tariff rate in place.

And then second, just a couple days ago, the US and China agreed in a weekend of trade talks to lower their tariff rates that they're charging on each other by 115 percentage points. So now the US is charging a 30% rate on imports coming in from China, and China's charging a 10% rate on imports coming in from the United States.

So all in, that brings the average tariff rate that the US is charging on goods coming in from about 20% down to 10%. So it's a huge step down, and markets are cheering that news.

But I would emphasize that that 10% average rate that the US is charging is still the highest in the post-war era in about 80 years or so. So in the short term—or rather over the last few weeks—big change in lowering tariffs, but in the big picture, we still have the highest tariff rates that we've seen in generations.

Amy: And so, Phil, thinking about that from a market perspective—what does that mean for broader markets and investors?

Phil: Yeah. Look, the initial reaction for markets has been to cheer the delays, and Blake mentioned that we—a week in on April 9th—saw a 90-day delay in terms of reciprocal tariffs and now a 90-day delay with China. One thing the market's going to have to contend with is, after 90 days what happens, right?

So it's not that we're out of the woods. I think there's still uncertainty, and we still have tariffs to contend with—which can, of course, lower growth and drive inflation. But the initial reactions from the market makes sense to me, which is what have we been talking about now for months in this setting is we've been talking about uncertainty. Investors do not like uncertainty. People that run companies do not like uncertainty.

So if this brings even incremental more certainty to the marketplace, markets are going to cheer that—and that's what we've seen from a risk market perspective, which does make sense to me.

Does that mean that we just move up in a straight line from here? I don't think that's likely. I think what's more likely is that you see some volatility. Again, these are delays, right? There's going to be headlines as we enter July on those reciprocal tariffs. What other countries are coming to the table? And not to mention, we have a tax legislation moving through Congress.

There's just a lot that is going on, and what was the impact, of course, on the second quarter earnings of what was essentially a trade embargo with China? So no, I think we're going to bounce around some, but this certainly gives us some relief in the markets as well.

Amy: And Blake, thinking about the broader market, what does all of this mean for our clients who are small business owners?

Blake: Yeah. It's a great question, and it's very important perspective to keep if anything because about half of US employment is in US firms with 500 or fewer employees. And those companies are going to be reacting very differently to these tariff developments than some of the big ones.

And two areas come to mind. First is, how are they going to be able to navigate a changing supply chain? So when you think about a huge company, they might already have existing trade relationships all over the world. And it's not going to be easy to redirect purchases and production from one country to another, particularly when we're talking about all the way across the globe. But the option might be there.

When we're talking about a smaller business, there's just not as many options. And they're either going to potentially have to pay the tariff rate or just decide, are we going to import or not import? So the costs are going to be quite a bit different.

And then the second thing that comes to mind is, some of these bigger companies might have better what we call pricing power. So if the company is faced with higher input costs or they have to start paying this tariff or they're paying more to redirect their supply chain, then how much of that are they going to be able to pass through to purchasers to protect their profit margins? And it would make sense that these larger companies might be able to do that more efficiently than the smaller ones.

So these are changes that we're only going to see as a lot more time goes by. We're very early into these developments. The data are very sparse in terms of us being able to monitor any of these changes. But I think that's excellent perspective to keep, and it's something that we'll be monitoring as best we can—if anything, just through our relationships and our contacts with our clients. That's where we get a lot of our interesting small business information rather than just through the big official data.

Phil: Yeah. In my travels, I'm lucky enough to talk to a lot of our clients, many of whom are small business owners. And what we've heard is something I've said before in this setting is that clients, the initial reaction was "I'm going to wait and see." Right? "I want to know see how this plays out. It's very difficult for me to make a major decision right now around my supply chain or capital expenditures or mergers and acquisitions. I went away." There was a push-away-from-the-desk-type mentality. I am hoping that we start to see that evolve now that we're getting a little bit more clarity than what we had in early April.

Amy: And one thing that I know everyone's keeping an eye on—whether you're a small business owner or an individual investor—is where's the Fed going to go from here? What's the path forward for interest rates?

Blake: Yeah. Interest rates are a big question. It affects all companies, big and small. And the tariff situation really poses a conundrum for the Federal Reserve.

The Federal Reserve is tasked with two main economic objectives—first, maximum employment, and second, stable prices. So they think about how they're adjusting the interest rate to maximize both of those objectives.

When the interest rate is too high or too restrictive, they run the risk of cooling the economy and the unemployment rate rising. But when monetary policy is easy, they run the risk of having too hot of a labor market and having inflation rise too high.

So think about what tariffs do. Most economic analysts are suggesting that imposing a multihundred-billion-dollar tax at the border is going to raise costs and potentially compress margins and lead to slower hiring for firms, which translated is—higher inflation and higher unemployment. So that runs counter to the Fed's objectives.

So as I said, this is a real conundrum for the Fed. And if this starts to make its way through the economic data, what a lot of people are saying or watching out for is, is the Federal Reserve going to prioritize one of these two objectives?

So if inflation is running a little bit too high but the labor market is slowing down because firms aren't hiring as much, then how are they going to choose to use their interest-rate tool to adapt to that? And they haven't given us a lot of information on that. I doubt they will. They're waiting to see what the actual data incoming is.

I would say that for the last few years, most people—the consensus has been that the Fed has prioritized the labor-market half of the mandate. Think about how they left the interest rate very low while they waited for labor market to recover. But there's also been a lot of lessons learned on the inflation front. It's just a very complex situation here. It's not a standard monetary policy or economic shock, and it's really leaving the Fed between a rock and a hard place.

Phil: Chair Powell's really emphasized in his recent press conference the data dependency of the Fed, that they're leaning towards hard data versus soft data, right? So soft data are things like consumer sentiment, CEO confidence. They're saying "We're waiting for the real data."

Actually, just this morning, we received fresh Consumer Price Index data for April not really showing any sort of reacceleration in inflation in April, right? So do we see that in future months? I think the Fed's really going to be in a wait-and-see, on-hold posture until the data really shows.

The other thing we should point out is the pause—especially as related to China and the US in this trade conflict—that is good news for the Fed. They're between a rock and a hard place, but maybe that rock or a hard place just got slightly softer. But certainly, there are major challenges ahead for the Fed and their dual mandate.

Amy: Thank you both for your time today and for answering questions. I know it's a really interesting time to be a market watcher, so thank you for all of this information. And if you'd like more information, please visit FirstCitizens.com/Wealth.

Authors

Phillip Neuhart | SVP, Director of Market & Economic Research

Capital Management Group | First Citizens Bank

8540 Colonnade Center Drive | Raleigh, NC 27615

Phillip.Neuhart@FirstCitizens.com | 919-716-2403

Blake Taylor | VP, Market & Economic Research Analyst

Capital Management Group | First Citizens Bank

8540 Colonnade Center Drive | Raleigh, NC 27615

Blake.Taylor@FirstCitizens.com | 919-716-7964

Important Disclosures

The views expressed are solely those of the authors and do not necessarily reflect the views of First Citizens Bank & Trust Company or any of its affiliates. This material is for informational purposes only and is not intended to be an offer, recommendation or solicitation to purchase or sell a specific investment strategy, any security or insurance product and should not be construed as legal, tax or accounting advice. Please consult with your legal or tax advisor regarding the particular facts and circumstances of your situation prior to making any financial decision. While we believe that the information presented is from reliable sources, we do not represent, warrant or guarantee that it is accurate or complete.

Many companies referenced in this content are independent third parties and are not affiliated with First Citizens Bank & Trust Company. All third-party trademarks, including logos, trade names, service marks and icons referenced remain the property of their respective owners.

Your investments in securities and insurance products and services are not insured by the FDIC or any other federal government agency and may lose value.  They are not deposits or other obligations of, or guaranteed by any bank or bank affiliate and are subject to investment risks, including possible loss of the principal amounts invested. Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Diversification does not guarantee a profit or protect against loss in a declining financial market.

First Citizens Wealth™ (FCW) is a marketing brand of First Citizens BancShares, Inc., a bank holding company. The following affiliates of First Citizens BancShares are the entities through which FCW products are offered. Brokerage products and services are offered through First Citizens Investor Services, Inc. ("FCIS"), a registered broker-dealer, Member FINRA and SIPC. Advisory services are offered through FCIS, First Citizens Asset Management, Inc. and SVB Wealth LLC, all SEC-registered investment advisors. Certain brokerage and advisory products and services may not be available from all investment professionals, in all jurisdictions or to all investors. Insurance products and insurance are offered through FCIS, a licensed insurance agency. Banking, lending, trust products and services, and certain insurance products and services are offered by First-Citizens Bank & Trust Company, Member FDIC, and an Equal Housing Lender, and SVB, a division of First-Citizens Bank & Trust Company. icon: sys-ehl

For more information about FCIS, FCAM, or SVBW and its investment professionals, visit www.FirstCitizens.com/Wealth/Disclosures.