Trump’s Liberation Day tariffs put the squeeze on the Fed.

Investors, executives, and diplomats will need time to absorb President Donald Trump’s mammoth tariff reveal on Wednesday. Initial media coverage was confusing, given the complexity of global trade rules. But as the squeeze on profits came into focus, U.S. businesses sounded worried. Global markets were, uh, negative.

“Liberation Day” carries profound consequences for the world economy as it frames America’s trade debate and provides more visibility into what it means to do business with Trump’s United States. It also delivers another major geopolitical jolt from Washington and raises the risks of financial accidents and recession.

Here is what we learned, and what we can expect.

First, the president’s Rose Garden posters revealed big numbers. Barring large carve-outs, they represent the most sudden adjustment of global trading rules since the 1930 Smoot-Hawley tariffs. The president says he is being “nice” by only charging half what his team calculates as the barriers U.S. products face, but these are significant double-digit adjustments to the terms of trade.

All else equal, the new tariffs may over time bring some manufacturing investments to the U.S. If the main goal is to create more factory jobs, however, the administration might also consider parallel strategies to improve education and workforce training, to cut the healthcare costs, and to build on the Biden administration’s large infrastructure investments.

Second, once the details shake out, the announcement may provide a little more policy predictability after weeks of conflicting messages. The great uncertainty around whether tariffs were meant to raise revenue, boost manufacturing or decouple from China has finally been resolved. It seems they are meant to deliver “all of the above.”

Less confusion doesn’t mean absolute clarity. This administration’s dealings with Canada and Mexico have set expectations that tariff implementation can be delayed, exceptions can be negotiated, and new duties may appear at any time. Uncertainty remains around how other countries will respond, too. But the very fact that so much detail was released yesterday at least helps frame the debates and risks ahead.

Third, trade policy action will now focus on reciprocal tariffs. Other levies on copper or pharmaceuticals may come or go, but the central point of trade negotiations will be the administration’s calculation of the barriers U.S. exports face with another country.

These crude calculations have drawn derision from economists. They are little more than the U.S. trade deficit with a country divided by imports from that country. Most economics textbooks stress that bilateral imbalances have less to do with trade rules than domestic incentives for saving and investment. Still, Treasury Secretary Scott Bessent has stressed that trading partners could negotiate a lower reciprocal rate, even if he downplayed the odds of any quick adjustments.

Fourth, geopolitical shocks will continue. Just as Europe and Japan began absorbing the idea that U.S. military support is now conditional on their own defense spending, they now learn that Trump’s harsh new tariff regime treats friend and foe alike. Japan (24% reciprocal tariffs), South Korea (25%) and Europe (20%) don’t seem to be getting much of a break because they are treaty allies. Taiwan’s 32% isn’t much different from China’s 34%, although China’s rate comes on top of 20% tariffs related to fentanyl and another 25% set during the first Trump administration.

Coming on top of the dismantling of the U.S. Agency for International Development, the tariffs deliver a fresh blow to poor countries that the U.S. has traditionally sought to bolster with preferential trade access. Sri Lanka now faces 44% tariffs, Angola 32% and Laos 48%. If the levels stick, China may have a huge opportunity, having announced in October duty-free trade with 44 developing economies.

Fifth, and finally, with tariffs coming in high, the Federal Reserve’s calculus looks especially difficult. Often, shocks of this size roil borrowers and lenders alike, which should make us all brace for a significant bankruptcy. In any case, the Fed will be watching to see if price increases from tariffs trigger fresh inflation. Tariffs themselves don’t necessarily lead to continuing price increases, but the Fed will be watching for signs that retaliation and counterretaliation are triggering a rise in inflation expectations.

Plummeting stocks and treasury yields on Thursday signaled rising fears that the tariff shock may also deliver a steep fall in demand here and around the world. We’ll hear more from Fed Chair Jerome Powell on Friday, but the sharp market selloff will raise pressure for quick rate cuts even as inflation hovers well above his 2% target. Watch for Trump to call for Powell’s resignation if he doesn’t move fast enough.

Corporate executives and global investors always say they just want more policy clarity so they can better assess the risks and potential returns. But when the fog lifts to reveal historic shifts in geopolitical alignments and large price shifts for global trade, the outlook turns more frightening than they ever imagined.

About the author: Christopher Smart is managing partner of the Arbroath Group, an investment strategy consultancy, and was a senior economic policy advisor in the Obama administration.