Navigating a Changing Economic Landscape: What Are The Impacts Of Fiscal Tightening And Monetary Loosening?

Our mission is to help you make wise, confident decisions in a world that doesn’t sit still. Economic policy—while seemingly abstract—can have real effects on your retirement, your savings, and your peace of mind.

In this month’s article we'll take a closer look at an economic shift that could impact your investments: the tightening of fiscal policy alongside a loosening of monetary policy. If that sounds technical, I’ll explain below. Either way, I encourage you to keep reading because the potential implications for your portfolio are worth understanding.

Let’s start with definitions:

What Is Fiscal policy? Fiscal policy is the government's use of spending and taxation to influence the economy. Fiscal policy tightening occurs when the government reduces spending or raises taxes, removing money from the economy.

What is Monetary policy? Monetary policy is the central bank's (The Federal Reserve) control of money supply and interest rates to manage economic conditions. Monetary policy loosening happens when the Federal Reserve lowers interest rates or increases money supply, making borrowing cheaper and encouraging economic activity.

When these policies work in opposite directions, it creates a balancing act—the government pulls back to address issues like budget deficits while the central bank stimulates growth to prevent recession. This combination attempts to achieve fiscal responsibility without damaging economic growth.

Are Tariffs a Form of Fiscal Tightening?

As almost everyone knows by now, a new round of large-scale tariffs is underway in the U.S.— one of the most significant in modern history. These tariffs are expected to generate between $400 and $500 billion annually. Unlike past policies that were more limited in scope, these new measures are far-reaching and already affecting the economic environment.

Why does this matter to you?

Let’s start with the not so great impacts.

The reality is, at least to this point, the cost of these tariffs isn’t being absorbed by foreign companies—it’s being passed along to American businesses and consumers. Whether it shows up as higher prices at checkout or thinner profit margins for companies you may be invested in, the impact is real. In practical terms, these tariffs are currently functioning like a tax increase within our borders.

Tariffs have been framed as a way to boost domestic manufacturing, and maybe over time they will, but up to now we’ve yet to see a meaningful uptick in companies reshoring their supplychains. And this is not surprising. A simple explanation is that business owners tend to make long-term investment decisions based on stability and incentives. For many business owners and corporations, it isn’t clear what will happen with tariffs over the next 3-5 years. Without clarity or consistency around trade policy, most companies will choose to wait and see.

A Temporary Brake on Long-Term Fiscal Pressure

The U.S. economy has been grappling with persistent budget deficits driven by rising costs in areas like healthcare, Social Security, and defense for over two decades. For context, the US federal budget for fiscal year 2025 is projected to have total outlays of $7.0 trillion, with an anticipated deficit of $1.9 trillion — meaning, the US is projected to spend $8.9 trillion on a $7 trillion dollar budget. This will result in a $1.9 trillion addition to the national debt.

These budget deficits became prominent starting in the early 2000s, when the combination of tax cuts, increased defense spending (particularly after 9/11), and rising entitlement costs created ongoing imbalances. Add in interest payments on the national debt (the balance of which is currently over $37 trillion — or approximately $108k per US citizen) and a polarized political climate, and it’s clear the fiscal landscape isn’t easily shifted.

Now, a more positive impact of the tariffs — they act as a short-term source of additional government revenue. Based on current estimates the US is expected to bring in approximately $250 billion of tariff income in 2025, and up to $3.3 trillion over the next 10 years. Since tariffs can be enacted through executive action rather than congressional approval, they’ve become a fast-moving lever for raising funds.

But, of course, there’s a potential catch.

While tariff revenue might appear to help reduce the deficit on paper, the broader economic effects—slower consumer spending, tighter business profits, and reduced tax receipts from income and corporate taxes—may ultimately offset much of the gain. In other words, the government may collect more in one area while losing ground in others. Time will tell.

The Federal Reserve’s Recent Response: Monetary Easing

In response to these economic headwinds, last week the Federal Reserve stepped in with more accommodative monetary policy. They announced a federal funds rate cut of one quarter point, bringing current rates to 4%-4.25%. If they wanted to be even more accommodative they could also inject additional liquidity into the economy, aka money printing. Though at this point there is no indication they intend to do this.

This tension between monetary and fiscal policy creates a push-and-pull effect:

• On one side, fiscal policy (via tariffs) is putting the brakes on growth.

• On the other, monetary policy (from the Fed) is trying to ease those brakes by making borrowing cheaper and money more available.

This dynamic interplay will shape how different asset classes perform in the coming months and years.

What This Means for Portfolios?

At Sequoia, we’re not in the business of predicting markets—we’re in the business of planning wisely, staying flexible, and building portfolios that are resilient. Here’s how this shifting environment might influence different types of investments:

• Fixed Income: If interest rates continue to drop, long-duration bonds could benefit. Lower rates also support bond prices, which could provide some cushion for more conservative investors.

• Equities: Growth stocks that are less exposed to tariff-related cost pressures may do well, especially if the Fed’s policy supports consumer activity and borrowing. That said, tariffs could be a headwind for companies with global supply chains and high input costs.

• Commodities: Materials tied to global trade—such as industrial metals or oil—might face pressure. But precious metals like gold and silver may see increased interest as investors seek safe-haven assets in times of economic uncertainty or a weaker dollar.

We actively monitor each of these areas, along with several others, in an effort to maintain proper allocation in our portfolios. This is a great example of why diversification is essential. No one asset class is a silver bullet. But thoughtful allocation across multiple investment types can help smooth the bumps and seize the opportunities these changing environments present.

We’re Here to Help You Make Sense of It All

At Sequoia Advisor Group, our clients know they’re more than just portfolios. Your financial life is personal—it touches your family, your values, and your dreams for the future. That’s why we take a relationship-first approach, grounded in trust, transparency, and planning that’s tailored to you. These fiscal and monetary shifts are important, but they’re just one part of a much larger picture.

If you have questions about how your investments might be affected—or want to revisit your plan in light of recent changes—our team is always here to help. Let’s keep your goals at the center, adjust where needed, and stay focused on what matters most: helping you find long-term contentment and satisfaction in your financial life.