Trump chose the worst time possible to start his tariffs war. One thing that people forget to take into account is context. During the first Trump’s administration, we haven’t had an inflation problem with central bank struggling to achieve their 2% targets sustainably. Today, we have the opposite problem. Central banks are struggling to bring inflation back to the 2% target.

This means that they are constrained from cutting interest rates and help the economy right when growth is expected to slow down due to the tariff policy. Not only tariffs are leading to slower growth, but they are also raising inflation expectations in the short term further constraining the central bank’s ability to cut.

These stagflationary forces are a big risk for the economy and markets in 2025.

There is still some hope in the air though. The hope is that next Wednesday, when the US reciprocal tariffs plan gets announced, we will see benign figures. That’s the only thing keeping the markets from freaking out.

But what if we get the opposite? What if we get higher than expected tariffs? Well, on a forward looking basis, it doesn’t look good. Markets will likely revise growth expectations further downward and inflation expectations will increase. The stock market is likely to sell off and with no central bank support, it could get ugly.

Gold should be a clear winner as it thrives in stagflationary environments given that real yields fall on rising inflation expectations and falling nominal yields (or yields rising slower than inflation expectations). We’ve been already seeing traders flocking to gold as a protection.

If the Fed starts to talk about tightening policy though, then gold will likely sell off too. We will see some serious short term pain in the markets which should finally bring inflation down to the 2% target and eventually open the door for more aggressive rate cuts.