US Trade Policy
US trade policy following the Supreme Court's IEEPA ruling (Feb 20, 2026) and the 15% Section 122 flat tariff. Analysis anchored to the 150-day authority expiration (~July 24), congressional action windows, and monthly trade data releases. Section 232 tariffs (steel, aluminum, autos) and Section 301 China tariffs remain in effect alongside the flat tariff.
US blanket tariffs (Section 122 or successor authority) of at least 10% remain in effect on July 24, 2026
All 5 markets below measure downstream outcomes conditioned on this event — comparing what happens IF TRUE vs IF FALSE.
Overall Assessment
The SCOTUS ruling striking down IEEPA tariffs and the administration's rapid pivot to a 15% flat tariff under Section 122 of the Trade Act of 1974 has created a temporary but coherent equilibrium across the US economy.
Five independent analytical lenses converge on a consistent picture: trade policy costs are being absorbed through corporate margin compression rather than transmitted to consumers through higher prices or through financial markets via tighter credit conditions. After 12 months of tariffs approaching Smoot-Hawley levels, consumer goods prices show essentially zero pass-through, financial conditions are at their loosest levels in the data window, and credit stress is easing on every measured dimension. The legal clarity provided by the SCOTUS ruling — replacing the constitutionally contested IEEPA authority with the statutory Section 122 framework — appears to have calmed financial markets even as it reset tariff rates. Beneath this surface stability, however, the analysis reveals an economy running on depleting buffers. Beige Book contacts report that firms which initially absorbed tariff costs are beginning to pass them through as pre-tariff inventories become exhausted. Manufacturing has lost 81,000 jobs over 12 months despite maximum tariff protection — automation is capturing the gains, not new hiring. The labor market is loosening through a demand-side channel (reduced hiring, not layoffs), with the 6-month NFP average at just +14K against a breakeven need of ~100K. A fragile equilibrium exists where the 7.6% dollar depreciation and the tariff reduction from IEEPA to Section 122 approximately offset each other on import prices, masking underlying inflationary and deflationary pressures that would emerge if either side of this balance shifts. The unanimous finding across all five lenses is that Section 122's 150-day statutory limit — expiring approximately July 24, 2026 — is the dominant variable determining the trajectory of every signal. It discourages supply chain restructuring (why invest for a 5-month tariff?), bounds the inflation persistence assessment (tariff layer has a defined end), freezes hiring in trade-exposed sectors (why commit to permanent headcount?), and creates a binary cliff risk for the tariff-dollar offset equilibrium (if tariffs revert, both tariff and dollar channels push inflationary simultaneously). Congressional action before July 2026 — to extend, replace, or allow Section 122 to lapse — will determine whether this temporary equilibrium transitions to a new steady state or unwinds disruptively. The Fed occupies an unusually constrained position. The policy rate at 3.50-3.75% is nominally restrictive, but actual financial conditions are substantially looser than the rate implies, driven by AI-fueled risk appetite, private credit expansion, and dollar depreciation. Cost-push inflation from tariffs sits at 2.7% core PCE — above target but moderating. The labor market is softening but not breaking. Two FOMC dissenters preferred a rate cut. The central bank faces a classic cost-push dilemma: cutting rates would accommodate tariff-driven inflation, while holding or hiking would further pressure a labor market already loosening without the normal credit-tightening trigger. The Section 122 expiration adds another dimension — if tariffs lapse and the one-time price-level effect reverses, the Fed may face a disinflationary pulse just as it has maintained restrictive policy.
Outcome Space
Each bar shows the probability range for a downstream outcome. Wider bars mean the outcome is more sensitive to the condition. The dot marks the current base-case estimate.
Key Findings
Section 122's 150-day expiration (~July 24, 2026) is unanimously identified across all five lenses as the single most important variable — it determines whether tariff costs eventually pass through to consumers, whether supply chains restructure, whether the tariff-dollar offset equilibrium holds, and whether credit markets reprice trade risk.
Firms are absorbing approximately 18-20 percentage points of combined tariff and dollar cost pressure through margin compression, yielding only 6% tariff pass-through to import prices after 12 months — but Beige Book evidence that inventory buffers are depleting signals this absorption phase is ending within 2-6 months.
Manufacturing employment declined 81,000 over 12 months despite maximum tariff protection, while output rose 1.3% and hours increased — tariffs are protecting output but not employment, with automation capturing the gains. This directly undermines the political rationale for the trade policy regime.
Financial conditions are deeply accommodative (NFCI -0.568, loosest in the data window) and credit stress is easing across every dimension despite the trade policy regime shift — the SCOTUS ruling and Section 122 transition appear to have REDUCED financial uncertainty by providing legal clarity and a bounded timeline.
A fragile equilibrium exists where the 7.6% dollar depreciation and the tariff reduction from IEEPA to Section 122 approximately offset each other on import prices, creating a temporary window of neutral import price pressure that masks underlying tensions — this equilibrium breaks in either direction at Section 122 expiration.
Signal Dashboard (10 signals)
Tariff costs overwhelmingly absorbed by foreign exporters and domestic importers with only 6% pass-through ratio after 12 months, though Beige Book signals inventory buffers are depleting and pass-through may accelerate within 2-6 months.
Supply chains have not restructured despite 12+ months of tariffs; manufacturing employment declined 81K, no reshoring activity visible, and Section 122's 150-day limit actively discourages long-term supply chain investment.
Inflation is primarily driven by cost-push pressures from a layered tariff regime; FOMC staff directly attributes core goods inflation pickup to tariff effects, while demand remains tepid and services inflation continues to decelerate.
Persistence risk is moderating as short-term expectations decline from peaks, services disinflation continues, Section 122 has a 150-day statutory limit, and demand weakness constrains firm pricing power; however, permanent Section 232/301 tariffs create an elevated price floor.
Labor market loosening through reduced hiring (6mo NFP avg +14K, JOLTS openings down 940K in 12 months, openings-to-unemployed ratio likely below 1.0) rather than increased separations — claims data remains benign at 219K 4-week average.
AHE YoY at 3.7% within STABLE range with 3-month annualized at 3.5% confirming normalization; moderating bias from quits rate at 2.0% concern threshold and tariff-driven real wage squeeze, but no acceleration or spiral dynamics.
Financial conditions are deeply accommodative (NFCI -0.568) and loosening across all dimensions — credit spreads below median, lending standards normalized, VIX declining — despite restrictive policy rate and trade policy uncertainty.
Credit stress is easing on every measured dimension: HY spreads compressed 31bp in 3 months, IG spreads below median, lending standards normalizing, default rates declining, and primary issuance markets functioning normally.
Trade policy de-escalation from IEEPA to Section 122 is driving broad-based dollar weakness (-7.6% YoY), asymmetric partner impacts, and BOJ normalization divergence, creating a structurally diverging global environment.
Spillover risk elevated by Section 122 expiration cliff (July 2026), fragile tariff-dollar offset equilibrium on import prices, and capital rotation from US assets, but mitigated by stable Treasury markets, no dollar funding strain, and improving EM conditions.
Cross-Lens Themes (5)
The July 2026 Cliff: Section 122 Expiration as the Dominant Risk Variable
All five lenses independently identify the 150-day Section 122 expiration (~July 24, 2026) as the single most important variable for their respective signal trajectories. Trade-transmission notes it discourages supply chain restructuring. Inflation-regime notes it bounds the persistence assessment. Labor-dynamics notes it creates a hiring freeze in trade-exposed sectors. Financial-conditions flags it as the primary catalyst for potential spread widening. Global-spillover identifies it as the source of a binary cliff risk for the tariff-dollar offset equilibrium. Congressional action (or inaction) before July 2026 is the universal pivot point.
Margin Compression as the Primary Absorption Mechanism
Trade-transmission finds only 6% tariff pass-through with firms absorbing ~18-20pp of combined tariff and dollar cost pressure. Inflation-regime confirms FOMC staff attributes core goods inflation to tariffs but notes absorption buffers are depleting. Financial-conditions finds this firm-level absorption has NOT translated into credit stress — NFCI at -0.568, HY spreads compressing, defaults declining. The economy is absorbing trade policy costs through corporate margin compression rather than consumer price transmission or financial tightening. This is inherently temporary: depleting inventories and compressed margins create a ticking clock.
Tariff Protection Failing to Generate Reshoring or Employment Gains
Trade-transmission finds STATIC supply chains with no reshoring despite 12+ months of tariffs. Labor-dynamics finds manufacturing employment declined 81K over 12 months while output rose 1.3% and hours increased — automation is capturing tariff-protected demand rather than new hiring. The Section 122 150-day limit provides zero incentive for multi-year capital investment. Tariffs are protecting output but not jobs, challenging the political rationale for the trade policy regime.
Dollar Weakness Creating a Temporary Disinflationary Offset
The 7.6% trade-weighted dollar depreciation should add 2-3pp to import costs, but import prices remain flat because the tariff reduction from high IEEPA rates to 15% Section 122 is approximately offsetting FX pass-through. Trade-transmission documents this as part of the near-zero consumer pass-through finding. Inflation-regime identifies it as supporting the MODERATING persistence assessment. Global-spillover identifies this equilibrium as fragile and time-limited — if tariffs revert at Section 122 expiration, both tariff and dollar channels would push inflationary simultaneously.
Orderly Loosening Across Labor and Financial Markets
Labor-dynamics finds LOOSENING through reduced hiring (not layoffs) with claims benign at 219K. Financial-conditions finds LOOSE and EASING conditions across credit markets. Both lenses converge on the assessment that the economy is softening in an orderly, non-disruptive manner. The labor market is not generating distress that feeds into credit deterioration, and financial conditions are not tightening in ways that would amplify employment losses. This dual-orderly dynamic provides a cushion that allows the tariff absorption equilibrium to persist longer than it otherwise would.
Analytical Lenses
How are trade barriers transmitting through supply chains and prices to the real economy?
What is driving current inflation — demand, supply, or expectations?
How are international dynamics feeding back into US monetary conditions?
Are financial conditions tightening or easing beyond what policy rates suggest?
What is the labor market signaling about inflation pressure and growth sustainability?