Trade Truce and Fed Steadfastness Fuel Wall Street Rally, But Risks Remain
36min read The S&P 500’s 2.9% surge on March 12, 2025, marked a rare moment of optimism in a market rattled by tariff wars and political uncertainty. The rally stemmed from two interrelated developments: President Donald Trump’s assurance that he has “no intention” of firing Federal Reserve Chair Jerome Powell and his signal that U.S. tariffs on Chinese imports will be reduced “substantially.” These statements, coupled with Treasury Secretary Scott Bessent’s acknowledgment that the trade conflict is “unsustainable,” injected a dose of stability into markets desperate for clarity. Yet beneath the surface, the recovery remains fragile, dependent on policies that have yet to materialize and risks that have not been resolved.
The Tariff Truce: A Fragile Bargain
The threat of a full-blown trade war had been weighing on markets for months. By early 2025, the U.S. had imposed tariffs as high as 145% on Chinese goods, while China retaliated with duties of 125% on American products. The strain showed in corporate earnings: Tesla’s quarterly profit plunged from $1.39 billion to $409 million, despite a 4.7% stock surge fueled by CEO Elon Musk’s pledge to focus on the company after reducing his Washington lobbying efforts.
Trump’s March 11 meeting with Musk provided a turning point. The president reiterated his openness to lowering tariffs, even as he dismissed calls to eliminate them entirely. This eased fears of an April 9 “reciprocal” tariff hike on semiconductors and pharmaceuticals, which had been delayed until July. Markets responded swiftly: Asian indexes like Hong Kong’s Hang Seng and Japan’s Nikkei 225 rose 2.4% and 1.9%, respectively, while the 10-year Treasury yield dropped to 4.27% from 4.41%, signaling reduced inflation fears.
Yet the truce is conditional. The International Monetary Fund (IMF) cut its 2025 global growth forecast to 2.8%, citing tariff-driven slowdowns. If trade talks stall, tariffs could remain elevated, sparking a recession. “The market is pricing in a de-escalation, but there’s still a 50% chance of a tariff spike,” said David Russell of TradeStation.
The Fed’s Tightrope: Independence vs. Political Pressure
The Federal Reserve’s role in this drama has been equally pivotal. Powell’s refusal to cave to Trump’s calls for interest rate cuts—despite the president’s public labeling of him as a “major loser”—has been critical to maintaining the central bank’s credibility. Legal barriers to his removal further deterred political interference: firing Powell would require proving “cause,” such as malfeasance, which Trump’s administration cannot credibly claim.
This stability allowed the Fed to adopt a “wait-and-see” approach, keeping rates in a 4.25%-4.5% range through Q1 2025. Powell warned that tariffs risked creating stagflation—simultaneous weak growth, rising unemployment, and higher inflation—last seen in the 1970s. While the Fed’s dual mandate of price stability and full employment remains intact, the path forward is fraught.
The Fragile Rally: What Could Go Wrong?
Despite the rebound, the S&P 500 remains 11.5% below its 2025 peak, underscoring investor caution. Key risks linger:
1. Tariff Volatility: Trump’s “whims” on trade policy could reignite uncertainty. The delayed July tariff deadline leaves markets exposed to sudden hikes.
2. Stagflation Risks: Powell’s warnings about inflation and weak growth are not hyperbole. The Fed’s balance between cutting rates to stimulate jobs and raising them to curb prices grows harder as tariff-driven import costs rise.
3. Global Contagion: While Asian markets rebounded, China’s Shanghai Composite dipped 0.1%, reflecting skepticism about trade talks.
Conclusion: A Rally Built on Hope, Not Certainty
The March 2025 rally reflects a shift from panic to cautious optimism—a bet that Trump’s trade rhetoric will soften and Powell’s Fed will remain independent. But the data is clear: without concrete tariff reductions or Fed policy adjustments, the gains may prove fleeting. The IMF’s 2.8% global growth forecast hinges on trade de-escalation, while the S&P 500’s 11.5% drop from its peak highlights how far markets have to climb.
Investors should remain wary. A sustained recovery requires more than promises: it demands the U.S. and China to finalize tariff cuts, the Fed to navigate stagflation without political interference, and corporations like Tesla to prove they can thrive amid profit pressures. Until then, markets will swing between hope and fear—until the next headline from Trump or Powell tips the balance again.
The Fed’s policy path, as seen in its rate adjustments since 2020, underscores its cautious approach. With rates near 4.5%, the central bank has little room to maneuver if tariffs fail to ease. For now, the rally is a pause in the storm—but the storm is still brewing.
