Tariffs and Turbulence: Marking the Halfway Point in 2025

The halfway point on the iconic interstate highway, Route 66, is located in the small town of Adrian, Texas. Route 66 travelers can mark the midpoint of their journey, precisely 1139 miles from each of the route’s endpoints in Los Angeles and Chicago, by visiting the famed Midpoint Café. While there’s no celebratory meal or fancy sign for photo ops for reaching the halfway mark of a fiscal year, it’s nonetheless a mark of progress where those in the financial industry can pause, reflect, and recharge before diving into the latter half of the year.In 2025, the first half of the economic year was marked by tariffs, shifts in regulations and policies, and a lingering sense of uncertainty. Although those trends are likely to continue, the economy is forging ahead, in spite of evident headwinds.Economic Trends: Growth, Inflation, and Market SignalsThe Atlanta Fed’s projection for Q2 GDP growth stands at 2.9%, a noteworthy pace considering recent economic hurdles. Nonfarm payroll additions in June surpassed expectations, with 147K new jobs and a slight reduction in the unemployment rate to 4.1%. Wages have even grown, with average hourly earnings up 3.7% YoY. This job market resilience has helped support consumer spending, even as inflationary pressures continue to lurk in the background.Tariffs are still a major part of the picture, filtering through supply chains and adding to pricing pressures across manufacturing, distribution, and retail. This has contributed to softening manufacturing output and a 0.9% decline in retail sales in May, signaling some reluctance among consumers. Globally, weak demand out of China and Europe, paired with a series of international rate cuts, has slowed price growth abroad. These international developments reflect how interconnected risks and policies are influencing domestic market sentiment.Consumers are proving adaptable so far, but caution remains prevalent as households and businesses assess the risks tied to ongoing trade negotiations and policy decisions heading into the second half of 2025.Banking Landscape: Balancing Growth and Margin PressureCommunity financial institutions (CFIs) are navigating an increasingly complex landscape this summer. Deposits at CFIs have grown YoY, thanks to stability in the job market and more cautious consumer behavior. Liquidity remains healthy for now, but rising deposit costs are beginning to put pressure on net interest margins, particularly as loan demand softens. Higher borrowing costs have tempered activity in both consumer and commercial lending, with real estate loan demand seeing the most significant drag.Amid these operational challenges, the sector is witnessing robust activity in mergers and acquisitions. Institutions are increasingly looking for efficiencies and competitive advantages through consolidation, often relying on stock-based transactions to structure these deals. For CFIs, the focus is centered on prudent lending, strategic partnerships, and margin management to navigate ongoing market changes and to maintain their role as local financial leaders.Housing: Affordability and Inventory Challenges PersistThe housing market continues to present a complex picture for lenders and consumers alike. With borrowing costs elevated and high prices of construction materials, new housing starts slipped to an annualized rate of 1.26MM units in May. However, completions ticked up slightly during the same period, providing some relief to still-tight inventory levels. Existing home sales in May showed modest growth, rising by 0.8% from April’s numbers. This resilience is particularly notable given average mortgage rates hovering near 7%, a level that has kept affordability concerns front and center for many buyers.Median home prices have continued their upward trajectory on an annual basis, though the pace of growth has moderated. Inventory of unsold homes increased both MoM and YoY, giving buyers more options, but not yet addressing the high prices. Builders have responded to softer demand by introducing incentives and selectively reducing prices, reflecting ongoing adjustments in the new home market.For commercial real estate transactions, lenders must remain attentive to local market shifts. Offering tailored lending solutions and competitive products can help support customers as trends evolve.Fed Policy: Holding Steady Amid UncertaintyThe Federal Open Market Committee held the federal funds target range at 4.25%–4.50% for a fourth consecutive meeting, emphasizing a patient approach as inflation trends and the broader economic outlook remain in flux. While inflation is expected to end the year at 3.1% for core personal consumption expenditures (PCE), policymakers are closely monitoring risks related to tariffs, government deficits, and the global growth environment.The Fed’s latest projections have trimmed GDP growth expectations for the full year to 1.4%. Market consensus points to a possible 25bp rate cut in September, but officials have reiterated that future decisions will be driven by incoming labor and inflation data. This commitment to flexibility will be key for CFIs and other market participants as they assess risk, lending strategy, and capital deployment into the fall.Looking AheadThe ongoing strength in employment and deposit growth provides much-needed stability as we move deeper into the summer. However, persistent inflation, policy uncertainty, and evolving sector conditions necessitate strong risk management, adaptable product offerings, and seeking strategic opportunities in partnerships and technology adoption. By focusing on community relationships and remaining attentive to new developments, CFIs can successfully navigate today’s crosscurrents — and lay the groundwork for long-term resilience.