Bond ETFs Wobble as Powell Ties Rate Policy to Tariffs

Setting the stage for bond ETF performance in the second half of 2025, Federal Reserve Chair Jerome Powell has finally stated what the fixed-income market has long suspected: Fed policy would be different if not for the Trump administration’s tariff policies.

“In effect, we went on hold when we saw the size of the tariffs, and essentially all inflation forecasts for the United States went up materially as a consequence of the tariffs,” Powell said at the European Central Bank’s annual forum in Sintra, Portugal.

It was a rare, candid acknowledgment that trade policy is now a central influence on the Fed’s rate path, confirming what many fixed-income investors have long suspected.

Treasury yields, which had fallen to two-month lows earlier in the day, reversed course and climbed following Powell’s remarks, as investors reassessed the risk of tariff-driven inflation heading into the second half of the year.

Bond ETFs were mostly mixed Tuesday as the fixed-income market continues to price out the probability of a rate cut when the Fed next meets at the end of the month.

TLT, AGG and the Uneasy First Half for Bonds

While 2025 has seen significant volatility in fixed income, most bond ETFs posted modest gains through June. Treasury-focused ETFs like the iShares 20+ Year Treasury Bond ETF (TLT) and the iShares Core U.S. Aggregate Bond ETF (AGG) initially benefited from slowing economic data and weakened consumer sentiment, which raised expectations for a potential Fed rate cut. TLT managed nearly a 3% total gain, while AGG rose 4% in the first half of 2025.

Despite lingering concerns about the inflationary impact of tariffs, the hard data haven’t shown a broad-based price surge in goods—at least not yet. That has allowed fixed-income markets to focus more on economic softness, which traditionally supports bonds. For much of the year, falling retail sales, weakening housing activity and softer labor market reports gave bond investors confidence that the Fed may eventually ease, lifting total return performance for long-duration ETFs like TLT.

However, Powell’s comments now make clear that the Fed sees trade policy as a key inflation wildcard, which may limit its ability to cut rates even in a slowing economy. That creates a delicate dynamic for bond prices going forward.

Stagflation Looms: Dual Challenge for Fed and for ETF Investors

The second half of 2025 is shaping up to be defined by a classic stagflation setup: Inflation that won’t go away and an economy that’s showing signs of fatigue. Powell and the Fed face the challenge of managing price pressures without choking growth, a balancing act that’s notoriously difficult.

For bond ETF investors, this means volatility is here to stay for the foreseeable future. If inflation accelerates because of tariffs, long-duration bond ETFs like TLT could suffer. But if the economy weakens faster than expected and inflation remains in check, those same funds could benefit.

In short, Powell’s remarks Tuesday signal a new chapter for fixed-income markets, one where policy uncertainty, trade dynamics and inflation fears are inseparable. Navigating that will require agility, diversified exposure and perhaps a greater tolerance for risk.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Investing in ETFs involves risks, and investors should carefully consider their investment objectives and risk tolerance before making any investment decisions.

At the time of publication, Kent Thune did not hold a position in any of the aforementioned securities.