Tariff Truce Sparks Wall Street Rally Amid Fed's Divergent Concerns

The U.S. stock market has staged a modest rebound in recent weeks, driven by a fragile optimism that the Trump administration’s aggressive trade policies may be softening. A temporary suspension of retaliatory tariffs on most U.S. trading partners—except China—and hints of potential negotiations have eased investor fears of a full-blown trade war. Yet beneath the surface, the Federal Reserve’s warnings of a looming stagflation threat and the administration’s continued escalation of tariffs on critical sectors cast a shadow over this fragile recovery.

The rally, which saw the S&P 500 rise 2.1% in April, has been led by technology and consumer discretionary stocks, sectors less directly exposed to tariff-driven cost pressures. Meanwhile, manufacturers and energy companies, which face higher input costs and retaliatory tariffs abroad, lagged. The divergence reflects a market betting that the administration’s “pause” on tariffs is more than a tactical maneuver—and that a lasting truce could revive corporate profits and consumer spending.

But the data tells a more nuanced story. While the temporary tariff reprieve—suspending country-specific duties for 90 days—has calmed immediate volatility, the broader trade landscape remains perilous. The administration’s concurrent Section 232 investigations into semiconductors, pharmaceuticals, and critical minerals could trigger new tariffs by year-end. China’s retaliatory tariffs, now exceeding 173% on some goods, have already disrupted global supply chains for electric vehicles and advanced manufacturing.

The Fed’s Dilemma: Stagflation Looms

Jerome Powell’s April testimony to Congress underscored the Federal Reserve’s growing unease. He warned that tariffs function as a “tax on the economy,” raising prices for consumers and businesses alike. With core inflation at 2.6%—above the Fed’s 2% target—and GDP growth projected to slow to 1% in 2025, the central bank faces a stark choice: tolerate higher inflation to avoid a recession or risk stifling growth by raising rates further.

Powell’s greatest fear is stagflation—a toxic mix of rising prices and stagnant growth. He noted that tariffs have already depressed net exports, contributing to a near-zero first-quarter GDP growth rate. “Unemployment is likely to rise as the economy slows,” he stated, while inflation remains stubbornly elevated. The Fed’s hands are further tied by the administration’s policies, which Powell acknowledged could force the central bank into “difficult trade-offs” between its dual mandates of price stability and full employment.

Winners and Losers in the Tariff Landscape

The market’s sectoral split mirrors this tension. Technology stocks, particularly in AI and semiconductors, have thrived as companies pivot to domestic innovation. Intel and AMD, for instance, have capitalized on government incentives for U.S. chip manufacturing, while AI firms like NVIDIA benefit from reduced reliance on imported components.

Meanwhile, manufacturers reliant on steel, aluminum, or Chinese-made components face a grim outlook. The National Association of Manufacturers’ lawsuit against Section 232 tariffs highlights their plight: tariffs on imported steel have raised production costs by an estimated 15% for U.S. automakers, offsetting any gains from tax cuts or a weaker dollar.

The China Tariff Escalation: A Double-Edged Sword

The administration’s 125% tariffs on Chinese goods—matched by Beijing—have created a paradox. While U.S. exporters of agricultural products and semiconductors suffer, domestic steel and aluminum producers have seen profits rise. However, the broader economic cost is steep: JPMorgan estimates that the tariffs could reduce U.S. GDP by 0.5% in 2025, while the United Nations warns of a “synchronized slowdown” in global trade.

The Path Forward: Truce or Turmoil?

Investors are now parsing two scenarios. The optimistic case assumes the 90-day tariff suspension evolves into a lasting deal, with the administration scaling back tariffs in exchange for Chinese concessions on intellectual property and market access. In this scenario, the S&P 500 could reclaim its 2024 highs, buoyed by a pickup in consumer spending and corporate capital investment.

The pessimistic view—endorsed by Fed economists—sees tariffs as a permanent feature of U.S. trade policy, with the administration doubling down on Section 232 investigations to secure “strategic autonomy.” In this case, stagflation becomes the new norm: inflation persists above 3%, GDP stagnates, and the Fed is forced to raise rates again, triggering a recession by late 2025.

Conclusion: A Delicate Balancing Act

Wall Street’s recent gains reflect a gamble that cooler heads will prevail in the trade wars. But the data paints a cautionary picture: the Fed’s inflation target is slipping further away, GDP growth is near stalling speed, and the administration’s policy tools—tariffs and trade investigations—are more likely to exacerbate than resolve these challenges.

The market’s fate hinges on two variables: whether the tariff truce holds long enough to rebuild confidence, and whether the Fed can navigate a path between inflation control and economic growth. With the U.S.-China trade relationship now resembling a slow-motion train wreck—and 75 countries already scrambling to negotiate exemptions—the odds of a smooth landing are narrowing. Investors would be wise to hedge their bets, favoring sectors insulated from tariffs (e.g., healthcare, software) while maintaining a wary eye on the Fed’s next move.

In the end, the era of “tariff optimism” may prove fleeting. As Powell’s warnings suggest, the economic costs of this administration’s trade policies are already etched in the data—and the Fed’s ability to offset them is fading fast.