Wealth Insights

Market drivers: Interest rates, inflation, tariffs and fiscal policy

Unpacking the key economic forces shaping market trends, investor influences, and what may still lie ahead.

This year, crowds of bankers, advisors, business owners and leaders, and those seeking investment advice have been gathering in cities across the Southeast. The draw? Regions’ Chief Economist Richard Moody and Chief Investment Officer Alan McKnight. These events also include guest speakers from Regions Government Affairs team, including Elizabeth Taylor and Borden Hoskins.

At a recent gathering Moody, McKnight, and Hoskins addressed a room of investors, business owners and leaders eager to hear some good news. As expected, the key topics vying for attention included the usual suspects of inflation, interest rates, and the lingering ‘will they, won’t they’ question about the Federal Reserve’s move on the Fed Funds rate. In addition, tariffs were front and center as the ups and downs, starts and stops continue to sputter and flex out of Washington. Lastly, questions around fiscal policy and the impact on both businesses and consumers loomed large.

The economy: GDP growth story – a tale of two quarters

At the start of 2025, Chief Economist Richard Moody noted the base-case forecast for real GDP growth was for it to normalize back towards the longer-term trend of around 2%. “That’s our starting point, and I could come up with a set of policy decisions that would make me think growth was going to be higher than that and come up with some that make me think growth is going to be lower.” And tariffs were at the forefront of the rationale.

Now that we are more than halfway through the year, it appears that his forecast was fairly accurate – the fluctuations seen in the first quarter (a decrease of 0.5% from the prior quarter) and the second quarter (an increase of 3.3% from the prior quarter) reflect the rollercoaster effect of real and anticipated policy decisions.

Looking back at the year so far, Moody noted that despite the first quarter GDP contraction, the U.S. economy is proving to be somewhat resilient, particularly considering the fits and starts around tariffs. “The market has slowed a little bit more than we thought would be the case, but we still believe there's room for the Fed to cut the funds rate before year-end.”

“We expected higher tariffs, but even absent that we did not think inflation was going to come back down to the over 2% target, at least until potentially 2026,” said Moody. “We certainly expected that the Fed would cut the funds rate in the context of the slowing economy, but not a whole lot.” The door remains open for one or two cuts by year-end, but continued uncertainty ensures continued unpredictability.

The markets: Earnings - the name of the game

McKnight reflected on the markets year-to-date and echoed Moody’s sentiment of resilience.

“When you think about where we are today, if you told me at the beginning of this year that we would see another banner year in equities, I would have been a little bit more challenged to be able to see that path, quite honestly,” said McKnight. “But as we sit here today, similar to the resilient economy, earnings have been more resilient, and earnings have really been the name of the game.”

Tariff talks continue to challenge business owners and leaders to adapt to an ever-changing fiscal policy environment.

“Companies are now on the line to better understand how much they're going to have to pay as it relates to the new trade policy, what that trade-off will be,” said McKnight. “So, will it be the company having to take on the brunt of that in terms of the costs? Will they be able to pass it on? Or is there going to be a hybrid? We really have not seen that flow through into earnings yet.”

McKnight noted that third and fourth quarter earnings, along with early next year’s results, will offer a clearer understanding of the impact.

“Independent of industry we’ll begin to see how much cost companies are able to pass along to their customers, or how much are they going to have to effectively eat as it relates to their operating margins,” said McKnight who also noted that operating margins are currently at some of their highest levels in decades.

McKnight went on to note that if companies can continue to produce above-average earnings and continue to grow at an above-average rate over time, they will receive higher valuations.

The markets: Valuations

“So as much as it's easy to point to valuations right now and say, they're too high, they're higher than historical averages,” noted McKnight. “But for those companies that can continue at above average rate and at higher pace, they'll continue to garner those higher rates, and it really gets back to the global view, which is one of, despite all the challenges we face, the U.S. is pretty well set up and there are many companies in the U.S. that are growing far beyond what their competitors are on a global scale, and therefore they're going to receive better valuations for that.”

The economy: What’s happening in Washington

Hoskins, a senior vice president on Regions Government Affairs team, calls Washington, D.C. home and makes it his business to know the political influence and policy as it relates to finance and banking.

Hoskins noted that since this administration's come in, the number one thing they are prioritizing in the banking and financial services space is digital assets: stablecoins, cryptocurrencies.

“We've seen the Senate and the House have already gotten the stablecoin issuance built through that's been inked into law,” shared Hoskins. “The second part of which they'll be working on is the market structure build where Congress will create a regulatory framework that will provide the sort of opening for the Commodity Future Traders Commission (CFTC) and the Securities Exchange Commission (SEC) to get involved in the regular regulation of digital assets.”

Hoskins also covered topics including sanction activity, bank capital, government-sponsored enterprise (GSE) reform, and regulatory reform.

“Something that the administration has already been doing and will continue to do is putting regulators back in the box of being regulators, and not just in the financial services space,” said Hoskins. “I think you'll see that across all sectors.”

The esteemed panel covered a wide array of additional influencing topics, including foreign investment in the U.S. dollar and government funding, while fielding questions on consumer sentiment and recent challenges with the Bureau of Labor Statistics.

Regions will continue to host Economic Summit events and Fraud Education events in markets across the Bank’s footprint throughout 2025 and 2026. Stay tuned for the latest insights from events from Indianapolis, Tampa, Miami, Nashville, and Knoxville. To explore bringing an event to your market, contact your Commercial banker or Wealth advisor.