U.S. President Donald Trump’s tariffs policy is not just wreaking havoc in Canada. It is also having a negative impact at home. In this guest column, Joe Palmisano of Connect Money outlines the effects of the on-again, off-again tariffs on the U.S. investment market and economy as a whole. (Note: All figures in U.S. dollars.)

By Joe Palmisano

The tariff landscape under the Trump administration has evolved significantly since the initial moves earlier this year, with implications rippling across markets, industries, and global relations. Trump’s strategy appears to oscillate between imposing tariffs and rolling them back as leverage. Delays with Canada and Mexico suggest successful short-term concessions, but the threat of reimposition looms if progress stalls. China, however, has retaliated with 10% to 15% tariffs on U.S. goods, signaling a tit-for-tat escalation. 

Economists estimate tariffs on Canada, Mexico, and China could raise household costs by $830 to $1,072 annually in 2025, per the Tax Foundation. Broader estimates suggest middle-income families might lose $1,700 to $3,900 yearly if tariffs persist. 

The tariffs uncertainty is eroding market sentiment. Since peaking in late January all major U.S. equity indices are down for the year and have relinquished all gains made following Donald Trump’s victory. The S&P 500, for example, has declined nearly 10%, while the NASDAQ Composite has dropped nearly 13% over the past three weeks. 

“The new U.S. tariffs on Canada, Mexico, and China are fuelling market volatility, economic uncertainty, and inflationary pressure on the U.S. economy. The S&P 500 has erased all 2025 gains, while the VIX index, a measure of expected volatility, has surged to its highest level since December,” Christian Salomone, CIO of Ballast Rock Private Wealth, shared with Connect Money.  

“Consumer and business confidence is wavering, with fears of recession or even stagflation beginning to surface. Economists expect inflation to rise, as major retailers like Target and Best Buy warn of price hikes on food and electronics, while tariffs on four million barrels of Canadian oil per day could drive up energy costs, particularly in the Midwest,” he added. 

At the same time, government bond traders have taken notice of the uncertainty and potential economic slowdown that the tariffs could cause. The U.S. 10-year yield has fallen about 40 basis points over the past four weeks and is now at its lowest level in more than three months around 4.22%, while the U.S. 2-year is trading back below 4%. 

Trump touts tariffs as a wealth-building tool, claiming they’ll “pay off our debt” and revive U.S. industry. His congressional address doubled down on this, though he’s hinted at flexibility, with Commerce Secretary Howard Lutnick suggesting possible rollbacks by the middle of the month. 

“…it seems to be a game of chicken with our major trading partners and if taken too far it may be a case where the party is over for equity markets and the chance of a significant correction is greatly increased,” Sevasti Balafas, CEO of GoalVest Advisory, told Connect. 

High-Stakes Play 

Trump’s tariff gambit is a high-stakes play—boosting some U.S. sectors while risking inflation, growth, and trade relations. The implications hinge on how long tariffs last and how fiercely others retaliate. 

“The American consumer cannot handle tariffs at a 25% level after experiencing inflation of the past couple of years and an already heightened price level,” Balafas said. “If the tariffs are fully enacted, consumer spending will likely fall into negative year-over-year growth levels.” 

“Given the overall strength of the economy, this fall in consumer spending would likely result in a stagflationary environment and not necessarily a full-blown recession. However, higher prices would pressure the Fed to ultimately increase rates.  The greater fears of a stronger recession, even severe, are possible.” 

Trump has also targeted the European Union with 25% tariffs with a focus on cars and other products, though the implementation timeline remains fluid. The E.U., the U.S.’s third-largest trading partner, exported $576 billion in goods to the U.S. in 2024. A 25% tariff could hit $29.3 billion of exports (per Bloomberg estimates), particularly affecting German carmakers (e.g., a 20% export drop projected by the Kiel Institute) and other manufacturers. 

“Tariffs on European countries are a strong possibility, especially given how quickly trade tensions escalated with Canada, Mexico, and China,” Salomone said. “However, Europe’s pledge to increase military spending could lead to fierce lobbying from the U.S. defense industry, potentially pushing for a more selective tariff approach to support European rearmament efforts. As a result, any tariffs on Europe may be more targeted, focusing on automobiles, machinery, and agricultural goods rather than broad-based measures.” 

The E.U. has vowed a “firm and immediate” response, with countermeasures like its playbook during Trump’s first term. Canada’s 25% retaliatory tariffs on $107 billion of U.S. goods and Mexico’s potential levies suggest a pattern the E.U. might follow, risking a transatlantic trade war. 

Long Game or Quick Resolution? 

The market uncertainty is also a function of how long tariffs could last. The question is it a “long-game” strategy, or will there be a quick resolution?  

“The equity market is keeping hopes alive for tariffs to be a bargaining position for the administration and not necessarily the long-term policy,” added Balafas. “However, it seems to be a game of chicken with our major trading partners and if taken too far it may be a case where the party is over for equity markets and the chance of a significant correction is greatly increased.” 

Salomone added, “The new administration is shifting U.S. foreign policy from a traditional rules-based approach to a more transactional one. As a result, the current tariffs do not appear to be a sustainable long-term strategy but rather a short-term tactical maneuver, albeit one that carries significant risks.” 

Testing Powell’s “Good Place” Claim 

The uncertainty surrounding Trump’s tariff policies is significantly intersecting with U.S. monetary policy, creating a complex dynamic for the Federal Reserve and the broader economy.   

Fed Chairman Jerome Powell, speaking last Friday, downplayed slowdown fears, asserting, “The U.S. economy remains in a good place despite elevated uncertainty.” He emphasized resilience in consumption, noting sentiment hasn’t reliably predicted spending recently. 

Pre-tariff projections eyed 2% GDP growth for 2025, but uncertainty and trade friction now cloud this, with stagflation (slow growth plus sticky inflation) a growing concern. Powell’s optimism hinges on stable consumption, but tariff-driven price hikes could erode purchasing power, testing his “good place” claim. 

Powell’s reluctance to overreact reflects a data-driven approach. With tariffs’ full impact unclear—pending E.U. details and retaliation scope—the Fed will likely hold interest rates steady at its March 19 meeting and likely in May as well. 

If tariffs lock in higher inflation (say, 3% or higher) and growth stalls (below 1.5%), the Fed faces a 1970s-style trap—rate hikes could deepen a slowdown, while rate cuts might fuel inflation. Declining yields hint markets see this risk, pricing in recession over inflation fights. 

“The Federal Reserve faces a policy dilemma,” warned Salomone. “The market anticipates three rate cuts this year due to slowing growth concerns, but persistent inflation from escalating tariffs could force the Fed to delay or limit easing measures.”

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