Tariff Truce Offers Relief—but Not a Return to Normal

Many experts believe the U.S.-China tariff pause announced this week has significantly reduced the risk of a recession ...  for now. But the agreement, which brings headline tariff rates down from near-embargo levels to “just” historically high ones, still leaves business borrowers navigating higher costs, tighter margins, and lingering uncertainty—conditions that banks will need to closely monitor. 

“[This] takes the recession/financial crunch off the table for forecasts for growth and sharply higher inflation for 2025,” John Silvia, CEO of Dynamic Economic Strategy and former managing director and chief economist for Wells Fargo, told Insider. “Both business and consumer confidence should improve, and that is reflected in the gains in equity markets.” 

Bank stocks rallied on the news, with the KBW Nasdaq Bank Index up more than 4.5% Monday, beating the broader market. Analysts at JPMorgan now put the probability of recession at around 35%, down from 60% in April. 

But banks shouldn’t get too comfortable. 

Tight margins are the new normal. Even after the rollback, the U.S. is imposing a 10% base tariff across most trade and 30% on Chinese goods. “To settle at current tariff levels is a negative for banks and their customers compared to the fourth quarter of 2024,” Silvia said. “Adjustments will have to be made, and profit margins will decline.” 

The squeeze on business borrowers may vary by sector. Silvia warned that borrowers “will face a higher cost of goods sold and thereby a squeeze in profit margins and credit concerns.” Meanwhile, agricultural banks may see particular relief, with Chinese tariffs on U.S. farm goods dropping from 125% to 10%—a shift that could be beneficial to the creditworthiness of their borrowers. 

Loan demand may pick up—but so could credit risk. Michael Redmond of Medley Global Advisors noted that smaller firms may respond by drawing on credit lines to absorb tariff-driven costs. “If it’s something that’s uncomfortably high but manageable,” he said, “they might borrow.” Silvia echoed that view, noting improved confidence and higher demand for credit—but also warned: “There will be firms that fail, but less than was feared a week ago.” 

The Fed is on pause—but inflation pressure is real. With inflation still above target and tariffs seemingly positioned to push prices higher this summer, the Fed took a pass on a possible rate cut last week and is unlikely to cut rates soon. “We actually have a potential situation where there may be a trade-off or tension” between inflation and employment, Fed Chair Jerome Powell said during a news conference after last week’s rate decision. Other noted market observers—including Mohamed El-Erian and Apollo’s Torsten Sløk—warned that any inflationary tailwind may slow the central bank’s plans to ease. 

Short-term optimism masks long-term uncertainty. The Consumer Price Index rose to 2.3% in April, and core inflation held steady at 2.8%. But economists warn that this may be the last calm reading before import taxes feed through to consumer prices. And while markets welcomed the pause, the longer-term outlook is murkier. Even under the new agreement, tariffs remain far above pre-2024 levels, and the path forward depends heavily on the next 90 days of negotiations. 

Silvia summed it up bluntly: “Banks and their customers are not out of the woods yet—but they are no longer in the dark of night.”