Payden & Rygel: Navigating uncertainty

April 23, 2025

2025—The proposed U.S. tariff package—described as one of the most significant trade policy changes in over 50 years—could raise effective U.S. tariffs from roughly 2% to as high as 30%, a level not seen since the 1930s. That insight was shared during a recent global macro webinar held by the global asset management firm Payden & Rygel.

Jeffrey Cleveland, Chief Economist, and Nigel Jenkins, Managing Director, Global Fixed Income, offered insight into the far-reaching implications of the U.S. administration’s proposed tariff policy. Drawing historical parallels, assessing macroeconomic risks, and outlining tactical investment responses, the team emphasized the complexity of the current environment and the elevated uncertainty facing investors.

A historic policy shift

'We’re witnessing one of the most significant policy shifts in modern trade history—comparable in scale to what we saw in 1971,' said Jeffrey Cleveland, referencing Nixon’s historic de-linking of the dollar from gold.

Cleveland noted that the administration’s rollout of its tariff table created confusion among markets and trade partners, largely due to inconsistent presentation and limited economic rationale. The calculation methodology—based on trade deficits rather than traditional economic metrics—has only added to investor concern.

What’s driving the shift?

Cleveland outlined five potential motivations for the tariffs:

1. Negotiation leverage
2. Trade deficit obsession
3. Job creation (especially in manufacturing)
4. Geopolitical maneuvering—especially concerning China
5. Revenue generation amid a widening federal budget deficit

While each may play a role, Cleveland suggested the policy is likely rooted in a structural desire to reduce the trade deficit—a view that ignores the reality of comparative advantage and global supply chains.

'The challenge isn't just the size of the tariffs—it’s the sheer uncertainty around implementation that’s creating a drag on investment and hiring,' Cleveland added.

Economic Outlook: Soft Growth, Elevated Risk

The economic impact of these tariffs, if implemented as proposed, could be severe:

• Consumer burden: Viewed as a major consumer tax, this would rank among the largest peacetime tax increases in U.S. history.
• Inflation: A likely one-time spike in prices, followed by a normalization period. Long-term expectations remain anchored.
• Labor market: While currently stable, any downturn in hiring or uptick in layoffs could shift Fed policy sooner than expected.
• Growth forecast: Downgraded to ~1% over the next 6–9 months, with increased risk of a stagflation scenario.

'While tariffs may be positioned as a negotiation tool, the economic impact is real and immediate—this functions as a massive tax on U.S. consumers and businesses,' said Cleveland.

Portfolio strategy: staying nimble

Nigel Jenkins provided context on portfolio positioning in the face of heightened uncertainty:

• Maintaining allocations close to benchmark
• Modest overweight to credit, but reduced from earlier levels
• Extension of duration, primarily at the short end of the U.S. yield curve
• Mild underweight to the U.S. dollar, reflecting domestic policy risks

'Uncertainty around global policy shifts like these calls for vigilance. It’s not the time to be too far from home in portfolio construction,' said Jenkins.

Jenkins also noted the unusual dynamic of a weakening U.S. dollar amid equity market stress, calling it 'highly unusual, and indicative of investor skepticism around U.S. policy direction.'

IV. MARKET POSITIONING & OUTLOOK (Nigel Jenkins)

• Portfolio positioning:
• Staying close to benchmark given high uncertainty.
• Maintaining a modest overweight to credit but scaled back recently due to widening spreads.
• Extending duration at the short end of yield curves (especially U.S. Treasuries), anticipating rate cuts.
• Dollar and global view:
• Unusual weakening of the U.S. dollar, despite equity weakness, signals global skepticism about U.S. policy direction.
• No viable reserve currency alternative to the dollar in the near term, but U.S. credibility is at risk if current trajectory continues.
• Congressional role:
• Tariffs fall under presidential authority — Congress has limited near-term control unless it reclaims power ceded decades ago.
• Legislative pushback is possible, but politically and procedurally challenging.

 Final Thoughts

The webinar closed with a historical reminder: while Nixon’s surprise move in 1971 was initially cheered by markets, the decade that followed was economically turbulent. Cleveland emphasized the danger of rigid conviction during volatile times.

'In this kind of policy fog, humility and flexibility are more important than ever,' Cleveland concluded.