The Strange Duet of U.S. Tariff Policy and Interest Rates

The Strange Ensemble of Trumpet and Double Bass

Imagine for a moment that you are in a grand concert hall of a massive orchestra named the global economy. Two of the most important instruments begin to play. One is the trumpet held by the president, producing fierce and high-pitched sounds that shake the world trade stage—this is U.S. tariff policy. The other is the double bass, playing deeply and heavily from the market’s depths, reflecting the economy’s health and future expectations—this is U.S. Treasury bond yields.

Originally, these two instruments were expected to harmonize by following the same score called ‘inflation.’ When the trumpet blared, “Raise tariffs to increase import prices!” the double bass would respond with a heavy tone, “Worried about rising prices, we must raise interest rates!”

But in 2025, we are witnessing the strangest duet in history. The White House’s trumpet is launching tariff bombs of 10%, 60%, even over 100% worldwide in a frenzied march, while Wall Street’s double bass quietly maintains low notes, playing a dirge of economic recession.

What on earth is happening? Beyond simple analysis, this story explores the real reasons behind this discord and the future of the global economy.

The Return of the ‘Tariff Bomb’: What Has Changed?

The Trump administration’s second term tariff policy is on a different level from before. Previously, it was a ‘precision strike’ targeting specific products from specific countries, like Chinese steel. Now, it resembles a ‘carpet bombing’ with global reach.

Imposing a ‘U.S. Tax’ on Everything

The biggest feature is the ‘universal base tariff.’ It’s like saying, “Want to sell goods to the U.S.? Then pay a 10% entry fee first.” Regardless of country or product, a base tariff is applied, sending a clear invoice of ‘America First’ costs to all global trade partners.

A Retaliation Policy of ‘If You Hit Me, I Hit You Back’

Added to this is the fearsome rule of ‘reciprocal tariffs.’ The simple, power-based logic: “If you impose a 25% tariff on American cars, we’ll impose the same 25% tariff on your cars.” This breaks the long-standing free trade promise of treating all partners equally and turns the global trade order into a jungle ruled by power.

These policies do more than raise import prices; they halt the massive conveyor belt of the global supply chain built on efficiency over decades. Companies now face a new question: not ‘where can we produce cheapest?’ but ‘where can we avoid tariff bombs?’

The Silent Market Warning: The Paradox of Interest Rates

Economic textbooks would say: “If tariffs rise, import prices rise, increasing inflation pressure. The central bank (Fed) will consider raising rates, and long-term bond yields will naturally rise.”

But reality mocks the textbooks. Despite the White House detonating tariff bombs daily to fuel inflation, the world’s most important price—the U.S. 10-year Treasury yield—remains surprisingly calm or even falls.

This graph reveals a shocking fact. While yields may jitter briefly after tariff announcements, the overall trend shows that instead of soaring with inflation fears, yields fall as uncertainty grows and investors flock to the safety of U.S. Treasuries. (More buyers push bond prices up and yields down.)

What is the market telling us?

• “Recession is scarier than inflation”: The market worries tariffs will close wallets and freeze corporate investment, dragging the global economy into a deep recession.
• “First, to the safest place!”: As trade wars intensify, global money flees risky stock markets and emerging economies to the safest haven—U.S. Treasuries—pushing yields down.
• “The Fed can’t just raise rates at will”: The market may be betting the Fed will be constrained by political pressure or the worst-case scenario of stagflation (recession plus inflation), preventing hasty rate hikes.

In conclusion, the bond market either dismisses the White House’s loud trumpet as a passing noise or warns that it could ultimately ruin everything.

Two Families Under One Roof: The Divergent Dreams of the White House and the Fed

At the heart of this strange dissonance is the deepening conflict between two giants driving the U.S. economy: the White House (government) and the Fed (central bank).

• The White House’s dream: Shouting “Strong America!” focusing on immediate economic growth, reviving manufacturing, and rallying its political base. Their weapons are tariffs, tax cuts, and pressuring the Fed to lower rates.
• The Fed’s dream: Legally mandated to focus on ‘price stability’ and ‘maximum employment,’ independent of politics, pursuing long-term economic stability through adjusting the benchmark interest rate.

Tariff policy worsens this relationship. Tariffs raise import prices, fueling inflation, while trade war fears freeze the economy. This creates stagflation—the worst dilemma for the Fed: raising rates to control inflation risks crashing the economy, lowering rates to boost growth risks runaway inflation.

Perhaps the White House is deliberately cornering the Fed, forcing it to cut rates to save the economy—a sophisticated strategy.

What Is Trump’s Real Intention?

The White House claims it is “protecting American workers and addressing trade deficits,” but deeper motives likely exist.

• Hypothesis 1: Pressing the reset button on the world order: “Discard all free trade rules we made and start anew with bilateral power-based deals.” Tariffs act as a powerful ’entry fee’ to bring all countries to the negotiating table.
• Hypothesis 2: Taming the Fed and seizing rate control: Creating a stagflation dilemma with tariffs forces the Fed to cut rates. The White House shakes the economy, leaving the Fed to clean up.
• Hypothesis 3: Winning the tech supremacy war with China: High tariffs on semiconductors and AI tech are part of a ’tech cold war’ to block China’s technological rise.
• Hypothesis 4: A political gamble to win domestically: The “Strong America” image rallies the base. Even if the economy suffers, blame can be shifted to China or the Fed, minimizing political risk.

These hypotheses likely act in combination. The key is that the tariff war is not just economic policy but part of a massive game reshaping politics, technology, and world order.

The Butterfly Effect of Tariffs: How the World Is Changing

The stone thrown by U.S. tariffs causes huge ripples across the global lake.

• China: The biggest victim undergoing dramatic change. With U.S. export routes blocked, China is expanding its domestic market, strengthening relations through the Belt and Road Initiative, and desperately developing technology. U.S. pressure ironically accelerates China’s economic restructuring.
• Europe: Yesterday’s friend is today’s competitor. Facing the U.S. is daunting, but bowing means losing pride and industry. Europe is forming a third bloc with independent supply chains and trade rules.
• Emerging markets: Caught in the crossfire. Economic instability raises the dollar’s value, crashing emerging market currencies and causing capital flight. Some like Mexico and Vietnam gain marginally, but most face huge risks.
• Allies like South Korea: Walking a tightrope. Security depends on the U.S., but the economy is deeply tied to China. They face a critical choice between U.S. demands to decouple from China and the vast Chinese market.

Who Benefits? The Already Emerging Side Effects

Contrary to White House claims, tariff policy deeply wounds the U.S. economy too.

• The bill passed to American consumers: Tariffs directly raise import prices. From Walmart essentials to European cars, everything becomes more expensive, thinning American wallets.

• Deepening corporate sighs: Companies importing parts face higher costs; exporters lose price competitiveness due to retaliatory tariffs. Most importantly, uncertainty causes hesitation in new investments and hiring, eroding economic growth.
• Cracks in the dollar empire: The most frightening side effect is the potential weakening of ‘dollar hegemony.’ As the U.S. weaponizes the dollar payment system, other countries seek alternatives. Led by China and Russia, they trade in other currencies or buy gold and euros instead of dollars. The dollar won’t collapse overnight, but cracks are forming in its ‘one ring.’

A New Era, How to Survive

We live in a ‘New Abnormal’ era where economic textbooks no longer apply. Now a single presidential tweet shakes markets more than economic data—a time of political risk. How do we survive this chaos?

1. Redraw the map (Geopolitical diversification): Beyond dividing stocks and bonds, consider which country or political bloc assets belong to. Move beyond U.S.-centric views to diversify into relatively tariff-free India, ASEAN, or independent Europe.
2. Find ’tariff-immune’ companies: Focus on firms with low foreign dependence, strong domestic markets, or unique technologies that overcome tariff barriers. Study supply chain maps as closely as financial statements.
3. Reconsider the meaning of ‘safe assets’: Even U.S. Treasuries are not immune to political uncertainty. Reevaluate traditional safe havens like gold and remain open to new assets beyond any single country’s control.

In conclusion, the discord between U.S. tariffs and interest rates is more than a mismatch of two indicators. It signals the end of globalization and the dawn of protectionism and self-reliance—a great transformation. In this massive dissonance, we can no longer rely on old scores. We must listen carefully to the fierce trumpet and the uneasy double bass, preparing our own sturdy ark for the coming storm.