In just two days, President Donald Trump’s tariff policy announced Wednesday has led to sharp decline in equity market indices, higher Treasury yields and increased market uncertainty.

The tariffs include a baseline 10% tariff on all imports, as well as an additional 25% tariff on imported automobiles and tariffs of 20% on the European Union, 24% on Japan, 25% on South Korea, 32% on Taiwan and 34% on China, among the announced rates.

These tariffs will stack up with other previously announced tariffs. For example, Trump had previously implemented a 20% tariff on all imports from China, bringing the total rate to 54%.

Uncertainty has gripped markets in recent months, with volatility a key theme as the president has routinely announced multiple rounds of tariffs on U.S. trading partners, sometimes followed by postponing or cancelling the tariffs based on negotiations.

The tariffs have implications for monetary policy, as the Federal Reserve seeks to reduce inflation to the 2% policy benchmark. At March’s Fed Open Market Committee meeting, Fed Chair Jerome Powell warned that the effects of tariffs could feed inflation. Jackson Garton, CIO of Makena Capital Management, says the uncertainty has already had a negative impact on market confidence, and the potential for inflation could compound that.

“You had a lot of soft data … that was really positive, and a lot of that has reversed pretty significantly in the first quarter of the year,” Garton says. “[That’s] largely due to the uncertainty that’s been created … [by] tariffs. One would approach tariffs more through the inflationary [environment] that they may create.”

George Brown, a senior economist at Schroders, warned in a statement that without accounting for any retaliation, the tariffs could increase U.S. inflation by 2% and cause a 0.9% hit to growth.

“For the Federal Reserve, the stagflationary impact of the tariffs puts them between a rock and a hard place,” Brown said in his statement. “In the near term, we think the path of least resistance will be inertia, given the heightened uncertainty around what the economic impact of tariffs will be.”

Alison Adams, managing principal and research consultant at Meketa, warns of the possible recessionary and economic impacts of the new tariffs.

“It may take an extended period of time to fully understand the financial and economic repercussions of the new tariff regime announced by the administration yesterday,” Adams says. “Financial markets may find their footing more quickly than policymakers, businesses and consumers. However, the long-run economic impacts of the new tariffs could increase the risk of a recession or potentially even stagflation here in the U.S.”

A Jumping-Off Point to Start Negotiations?

Analysts at several firms have pointed to the possibility that the most recently announced tariffs are a negotiating ploy, as they are not set to go into effect until next week.

“Eye-watering tariffs on a country-by-country basis scream, ‘negotiation tactic,’ which will keep markets on edge for the foreseeable future,” said Adam Hetts, global head of multi-asset at Janus Henderson, in a statement. “Fortunately, this means there’s substantial room for lower tariffs from here, albeit with a 10% baseline in place.”

Chris Zaccarelli, CIO of Northlight Asset Management, said despite the room for changes to the announced tariffs, the immediate reaction has been significant.

“The silver lining for investors could be that this is only a starting point for negotiations with other countries and ultimately tariff rates will come down across the board,” Zaccarelli said in a statement. “But for now, traders are shooting first and asking questions later.”

Whether the market reaction will impact the Trump administration’s approach to negotiations remains an open question.

“We’ve seen the administration have a surprisingly high tolerance for market pain,” Hetts said. “Now the big question is how much tolerance it has for true economic pain as negotiations unfold.”

Deutsche Bank, in a note to clients sent Thursday morning, warned that the tariffs could cut growth by 1 to 1.5 percentage points this year, while adding a similar amount to core personal consumption expenditures price index inflation.

“These are more significant levels of tariffs than I think people were expecting going into this,” says Ian Toner, the CIO of Verus Investments. “There’s obviously an immediate reaction, which we’re seeing in markets today—[a] risk off reaction. The question that’s really going to drive long-term behavior is what happens after this, in the sense: To what extent are these designed as a lever for negotiation? Really, what matters for long-term portfolios is: Where does this really end up three, six, 12 months from now?”

Implications for Institutional Investors

For pension funds and other long-term investors that invest on decades-long timelines, staying put appears to be a common approach so far.

“There has been an assessment by investors of what markets and economies are going to do, and that’s been changing as news flows come out,” Toner says. “But I don’t think investors have fundamentally changed the way they go about the process of asset allocation.”

Ralph Berg, the CIO of the Ontario Municipal Employees Retirement System, told CIO in March that the fund did not anticipate reducing its allocation to U.S. investments in light of tariffs.

Kristina Hooper, the chief global market strategist at Invesco, echoed his sentiment.

“I’ve been getting the same question from investors, ‘Should I change my allocation?’ and my answer is always the same: For those who have a long time horizon and are well diversified across and within the three major asset classes (stocks, fixed income, and alternatives), I would typically favor staying the course,” Hooper said in a firm report.

“What drives long-term portfolios is long-term economics, long-term practicalities, long-term risk premium,” Toner says. “The focus has to be on the long-term portfolio structure questions, and that’s less driven by news flow than by underlying tectonic movements.”