tariffs – Baker Asset Management, LLC

Here’s Why Interest Rates May Stay Higher for Longer

The economic stars were aligning beautifully at the beginning of the year for the Federal Reserve to start to gradually lower interest rates in 2025. Then, in February our economy, and much of the world’s economies, were upended with a shock and awe tariff policy by the Trump administration. This, coupled with changing global perceptions of U.S. governance and institutions has forced the Fed to rethink its interest rate strategy. Subsequently, the odds of any rate cuts this year have dropped significantly since the end of 2024.

Here are the main suspects that may keep interest rate higher for the foreseeable future:

Tariffs: This chart summarizes the effective tariff rate that U.S. companies have had to pay since February:

The green line shows the effective tariff rate from February to June of this year. Prior to February, the U.S. was paying an effective tariff rate of about 2.4%. Currently, we are paying an effective rate of 13.45%. We were as high as 26.85% in April, so we have come off of the highs but still are at a level that is almost 6 times what we were paying at the start of the year. Now, it’s showing up in the prices that we are paying and also in the number of small businesses that have had to lay off workers, suspend operations, or shut down completely. This increase is just not sustainable and higher prices mean rates have to stay high to fend off runaway inflation.

Weaker Dollar: Take a look at this chart of the US Dollar hitting a 3-year low recently.

The black is the dollar index value, the red is its 200-day moving average and the green is its 50-day moving average. There are several factors contributing to the downward pressure on the U.S. dollar, including:

Tariffs and Trade Policy
Global Concerns about U.S. Economic Growth and Recession Risks
Fiscal Deficit and Debt Concerns
Erosion of U.S. Except

In essence, a combination of protectionist trade policies, concerns about the U.S. economy’s resilience, fiscal anxieties, and a shift in global investor sentiment are all contributing to the weakening of the U.S. dollar in 2025. A weaker dollar is inflationary and another reason for the Fed to keep rate elevated.

As I have said before, these issues are self-inflicted, which means they can be resolved quickly if we act now. The longer these policies are in place, the harder it will be to recover from them. Then, the Federal Reserve will have to lower interest rates but for all the wrong reasons, aka a recession.

Please comment or send an email if you have any questions.

Joe Baker, CFP®

Baker Asset Management, LLC

joebaker@bakerassetmanagement.com

An Economic Storm is Coming for the US

In my last post, I talked about how our tariffs could adversely affect the 33+ million small businesses in the U.S. Today, I want to continue that discussion but go into a little more detail with some interesting illustrations that show the contribution that our small businesses have to our economy.

Tariffs have been used throughout history to protect domestic industries. When implemented tactically on certain materials or products within a broader, strategic economic plan, they have had some success. However, when you carpet-bomb everything simultaneously that is imported into our country with tariffs without letting our companies prepare and plan, it results in chaos, as we have seen already.

When our government implements very high tariffs suddenly, they impact many businesses, particularly small businesses, because the tariff must be paid by the business when the imported goods arrive in the US. Small businesses that have relied on a stable US system for decades need to adjust quickly and may not have the working capital to pay tariffs. Ships might remain offshore, orders could be canceled, and many small businesses may face bankruptcy.

There have been some exceptions for large businesses, but they are the companies that need them the least. These massive corporations have the flexibility and the resources to handle unforeseen expenses. Not giving the same breaks to small businesses does not make any sense. Just look at these charts below to see why:

This shows that 85% of the capital expenditures, basically the money that businesses reinvest into themselves to expand and grow, in the US economy comes from small businesses. These guys should be getting the tariff exemptions.

Here we see that small businesses (less than 500 employees) account for 110 million workers of the labor force, approximately 75% of the total number of workers employed in the country. Damage to this large of a swath of the economy would be devastating.

So now, the challenges for small companies have become a big problem for the US economy. Even if tariffs get knocked down substantially from their current high levels, many small businesses will not be able to absorb the costs and will have to pass the costs onto their customers, reduce their payroll, or worse, shut down.

Let’s hope we abandon the blanket tariff policy and instead develop a long-term plan along with our trading partners that will benefit all parties.

Please comment or send an email if you have any questions.

Joe Baker, CFP®

Baker Asset Management, LLC

joebaker@bakerassetmanagement.com

Why Small Businesses Will Be Hurt Most by Tariffs

I thought I’d take a look at how the current trade war could affect the small business community here in the U.S.

First , let’s look at some numbers. There are 33.27 million small businesses in the U.S. with fewer than 500 employees. These businesses employ 61.6 million people, which is 45.9% of the U.S. workforce, and account for 33% of the country’s imports.

For those that don’t know, the tariffs that we have implemented so far this year are levies, or fees, on imported goods to the U.S. that have to be paid by the company that imports them. These tariffs are hitting small businesses particularly hard, since they almost all rely on some quantity of imported materials. Unlike large corporations, small businesses often lack the financial cushion to absorb rising costs, forcing them to either raise prices or take a financial hit. Also, many small retailers and manufacturers are struggling with uncertainty, as tariffs have been fluctuating, making it difficult to plan ahead.

Here’s a detailed breakdown on how the imposition of tariffs can significantly impact small businesses:

Increased Costs of Goods:

Imported Materials and Goods: Many small businesses rely on imported raw materials, components, or finished goods. Tariffs, being taxes on these imports, directly increase their cost. For example, a local furniture maker importing wood or hardware will face higher expenses.
Reduced Profit Margins: Unless small businesses can pass these increased costs entirely to their customers, their profit margins will likely shrink. Small businesses often operate with tighter margins than larger corporations and have less capacity to absorb these additional expenses.
Cash Flow Strain: Higher upfront costs for imported goods can strain the cash flow of small businesses, potentially affecting their ability to manage day-to-day operations and invest in growth.

Price Increases for Customers:

Passing on Costs: To maintain profitability, small businesses may need to increase the prices of their products or services. This can make them less competitive compared to larger businesses that might absorb some of the tariff costs or domestic producers not subject to these import taxes.
Loss of Customers: Price-sensitive customers might opt for cheaper alternatives from competitors, leading to a decrease in sales volume and customer loyalty for the small business.

Supply Chain Disruptions:

Difficulty in Sourcing: Tariffs can disrupt established global supply chains, making it harder for small businesses to obtain the necessary goods or materials. This could lead to production delays, an inability to fulfill orders, and a loss of customer trust.
Finding Alternative Suppliers: While businesses might look for domestic suppliers or suppliers in countries not affected by tariffs, this shift can be time-consuming, costly, and may not always offer the same quality or price. For instance, a small electronics repair shop that relies on specific imported components might struggle to find suitable local alternatives quickly.

Reduced Competitiveness:

Against Larger Businesses: Larger companies often have more leverage to negotiate with suppliers, find alternative sourcing, or absorb tariff costs due to their scale. This can put small businesses at a significant competitive disadvantage.
In Export Markets: When the U.S. imposes tariffs, other countries often retaliate with their own tariffs on U.S. exports, which we have already seen. This can harm small businesses that export their products, making them more expensive for foreign buyers. For example, a local artisan food producer exporting to a country that imposes a retaliatory tariff will see their goods become pricier in that market.

Uncertainty and Investment:

Difficulty in Planning: Fluctuating tariff policies create uncertainty, making it difficult for small businesses to plan for the future, make investments, or forecast their financials accurately.
Hesitation in Growth: The unpredictable economic climate caused by tariffs can make small business owners hesitant to expand their operations, hire new employees, or invest in new equipment.

To summarize, tariffs pose significant challenges for small businesses, primarily through increased costs, potential price hikes, supply chain disruptions, and reduced competitiveness. Finally, as history has taught us, there are no winners in a trade war. Hopefully, we can get that message through to the Trump administration sooner rather than later.

Please comment or send an email if you have any questions. Thanks!

Joe Baker, CFP®

Baker Asset Management, LLC

joebaker@bakerassetmanagement.com