New Tariffs Likely to Result in Volatile Mortgage Rates, Higher Construction Costs

President Trump’s newly announced tariffs will bring higher prices, slower economic growth, higher unemployment and higher construction costs. Mortgage rates fell following the announcement and will remain volatile as more details emerge and negotiations take place ahead of April 9, when the tariffs will go into effect.

Update: April 3, 2025

Size of Tariffs 

Following President Trump’s announcement on Wednesday, Goldman Sachs calculated that the sum of the newly announced tariffs would increase the 2024 average tariff rate of 2.5% by 18.7 percentage points, yielding a final average tariff rate of 21.2%. This would be the highest tariff rate for the US in about a century. Other analysts have estimated that the tariff rate may range from 22%-29%.

The situation remains very fluid. Negotiations and product-specific tariffs will likely change the picture. Interviews with Treasury Secretary Scott Bessent and President Trump’s own remarks suggest that the announced tariffs are a maximum level from which countries can negotiate a lower rate in exchange for concessions (though the 10% global minimum seems less likely to change).

One nuance is that President Trump’s economics team appears to have calculated country-specific tariffs based on our trade deficit with a nation divided by our imports from that country—rather than based on actual barriers to trade. This nonsensical methodology means that a country dropping its tariffs does not mechanically change the reciprocal “discounted” tariff we are charging them. Presumably, the President is looking for concessions of a different nature or will simply change how the reciprocal rate is determined.

Macroeconomic Impact

• Inflation: The simple rule of thumb that economists use based on past evidence is that a one percentage point increase in the tariff rate increases the rate of inflation by 0.1 percentage points. So we would expect a 18.7 percentage point increase in the average tariff rate to increase core inflation from 2.8% to 4.7%. For context, core inflation peaked at 5.6% in 2022.
• Growth and employment: These tariffs are significantly larger than what was expected by most wall street economists. If they are not meaningfully reduced in the negotiation process, GDP growth is likely to come in below 1%, perhaps skirting negative territory. The unemployment rate could rise up to 5% from 4.1% currently. Polymarket currently has 2025 recession odds at 47%, which I think is reasonable.
• Timing of impact: Analysts are expecting the impact of the new tariffs to hit in Q2 and Q3 though there is disagreement about whether the inflationary or growth impacts would arrive first. The timing could impact the Fed’s response, as we may experience temporary illusions where it seems like the impacts are smaller than they actually are.

Fed Response and Rates 

Ten year yields are falling today as investors seek safety in bond markets and price in expectations for more Fed cuts this year. Daily mortgage rates fell 12 basis points to 6.63%. What happens from here depends on the Fed’s actual response. The dominant narrative currently is to expect lower rates because the economy will fall into a recession. That may well prove correct, but I think it is far from guaranteed. The risk of stagflation—where rates remain high despite sluggish growth—is real.

Fundamentally, the Fed needs to forecast whether the potentially one-off inflationary impact of the tariffs matters more than the recessionary (and therefore disinflationary) impact. No one knows the answer to that question. It depends on how much currency markets adjust to potentially offset the tariffs, the decisions of every business along the supply chain, and how consumers react. It is possible that the Fed will cut rates 3-4 times this year as markets currently expect, but that would require them to prioritize the employment side of their mandate above the inflation side, which would only happen if they believe the inflation to be transitory. Therefore, in order for the expected Fed cuts to materialize, three things would need to be true:

1. 1. No further escalation in the trade war: Any retaliation followed by escalation from the US would make the bout of inflation less transitory.
   2. Consumers do not start to expect high inflation (“unanchoring of inflation expectations” in Fed-speak): When people believe there will be high inflation, they will act in a way that brings about inflation. The key will be to watch inflation expectation measures in the University of Michigan and Conference Board surveys of consumer sentiment, which are already showing signs that consumers are expecting higher inflation in the future.
   3. Hard evidence of a real economic slowdown: So far, the evidence of economic weakness has mostly been in consumer and business sentiment surveys. The Fed would need to see rising unemployment rates and sluggish or even negative job creation.

Original Post: April 2, 2025

New Tariffs

• There will be a new baseline global tariff rate of 10% for goods imported to the US. Certain countries will be subject to higher tariffs, including China (34%), EU (20%), Taiwan (32%), and Japan (24%). It appears that Canada and Mexico will continue to be subject to 25% tariffs except for goods that are covered by the USMCA, which covers the majority of imports from these countries.
• At the beginning of President Trump’s second term, the average tariff rate was about 2.5%. Before today’s announcement, it had risen to about 8% after the President imposed new tariffs on China, steel and aluminum, and some goods from Mexico and China.
• Expectations coming into today’s announcement were that the average tariff rate would rise to about 17% by the end of the year. Given the carve outs for Canada and Mexico, and lingering ambiguity around which tariffs are additive on top of existing tariffs, it’s not immediately clear where the average tariff rate will land after these announcements. However, it’s likely that the size will exceed what was expected.
• Notably, these tariffs do not take effect until April 9, providing some time for negotiations to take place and for some of the announced tariffs to be walked back.

Macroeconomic Impact: Higher Inflation, Slower Economic Growth, Uncertainty Around Fed Rate Cuts

• Forecasters are expecting core inflation to rise to ~3.5-4.0% from the current 2.8% by year end. And for 2025 GDP growth to end the year at around 1%, down from 2.4% in 2024. The unemployment rate is expected to increase to 4.5% from 4.1% currently.
• The odds of a recession in the next 12 months have increased to about 40% from about 15% at the start of the year.
• These are all just from the tariffs. There is also the backdrop of cuts to the federal government and stricter immigration policy, which both drag down economic growth and boost inflation as well.
• Whether the Fed cuts rates as both inflation and unemployment increase depends on whether the Fed views the bump in inflation as transitory. Currently the Fed is expected to cut rates 2-3 times in 2025, starting in June. 
  • • Tariff-driven inflation may well be short-lived, as the increase in prices happens one time. 
    • But any escalation of the trade war and the potential un-anchoring of inflation expectations among consumers (i.e., when people expect inflation, they act in ways that produce more inflation) could cause prolonged inflation. Chair Powell’s most recent remarks suggest he may be willing to “see through” an impending bout of inflation and make the expected cuts, but history tells us that the Fed’s words are sometimes not the best predictor of the Fed’s actions.

Housing Market Impact: Volatile Mortgage Rates, Rising Cost of New Homes

• Rates may be volatile over the next few days as countries respond to these tariffs and negotiate with President Trump. There are a few forces pushing mortgage rates in different directions:
  • • On the one hand, slower economic growth, higher recession odds, and a sell-off in the stock market would push bonds to rally, causing mortgage rates to fall. 
    • On the other hand, higher inflation for longer, and the possibility of the Fed keeping the Fed funds rate higher would push mortgage rates higher. 
    • Whether rates fall or rise depends on whether this bout of inflation is temporary.
• The cost of building new housing will also increase because construction relies heavily on imported materials and immigrant labor. Roughly a third of the lumber, and most of the drywall and home appliances, used in new residential construction are imported. All of those materials will now cost more, even with the current carve outs for Canada and Mexico. 
  • • How much more depends on a few factors: where the tariff rates finally land and their longevity, how much exporters choose to decrease prices, any currency market adjustments in response to the new tariff policy, and how much importers pass the increased costs to their customers.
    • For homebuyers, how much more a new home will cost depends on how much of the increased expenses builders pass on. But it’s very likely prices of new homes will increase meaningfully.

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