Weekly Buzz: The US’s new tariffs may keep rate cuts off the table

New US tariffs of 10% to 12.5% took effect last Friday, covering more than 80 countries in total. For most exporters, not much has changed. The new duties replaced a surcharge that expired earlier, so the average tariff on US imports only ticked up from 11.0% to 11.2%. For the Federal Reserve (the Fed), however, the risk of stickier inflation complicates an already difficult outlook on interest rates.

What’s going on here?

The US Supreme Court struck down last year's Liberation Day tariffs back in February, ruling that emergency powers didn't cover them. That brought the average tariff down from 14.9% to 8.2%. Four days after that ruling, the administration replaced them with a 10% surcharge, which ran for 150 days before expiring last Friday.

This round of tariffs uses a law aimed at unfair trade practices. US officials spent months investigating whether their trading partners were doing enough to stop forced labour.

Canada was singled out: about $20 billion worth of Canadian products face 50% tariffs, starting in 30 days. US officials made a point of noting that Canada, alongside China, was one of only two countries to retaliate against last year's tariffs rather than negotiate.

What’s the takeaway?

The Fed held rates steady at 3.5–3.75% on Wednesday, its fifth straight meeting without a move. Tariffs are part of the reason. Somebody pays for these levies, namely American importers and consumers, and that keeps prices running hot.

Three of the Fed's 12 officials dissented, however, and voted for a quarter-point increase instead. The central bank usually moves as a bloc, and the last time three members broke away in the same direction was 2016. It’s a clear sign that parts of the Fed think inflation needs cooling. Traders are now pricing in one to two rate hikes before the year is out. In January, they expected cuts. 

Getting this call right matters less if your money is spread across regions and asset classes. What's worth deciding is how consistently you invest.

(For a portfolio that reassesses its asset allocation as inflation and growth data change, see General Investing.)

Investors’ Corner: How often should you invest?

Should you invest weekly, monthly, or quarterly? Most investors who've already committed to investing regularly land on this question at some point, and it makes sense. Once you've decided how much to set aside, how often feels like the next key variable.

The honest answer is that it makes almost no difference. Take four investors who each put $10,000 a year into the S&P 500 since 1996. One invested the full amount on the first trading day of each year, one split it quarterly, one monthly, one weekly. 30 years later, all four each ended with more than $2 million, each earning about 10.8% a year.

It comes down to what dollar-cost averaging, or DCA, is doing in the first place. Every contribution goes to work as soon as it arrives – as opposed to sitting in cash – and whether that's the first of the month or every Friday changes little over a long time horizon.

That frees you up to pick a schedule that suits your needs. For most people, that means matching it to your income. A contribution timed to money you've already received and accounted for won't compete with anything else in your budget, and it doesn't ask you to make a fresh decision every time.

(For a deeper dive, read this month’s CIO Insights: How do you make millions? Give it time.) 

Past performance is not an indicator of future returns. These articles were written in collaboration with Finimize.