15 minute read

Welcome to the latest edition of “Piece of the Puzzle”!

This year has been a very topsy-turvy one in the markets, especially in light of President Trump’s emphasis on tariffs for much of this year. “Liberation Day,” as it has become known, was hardly liberating for the equity markets at that time, but since then we have seen a very significant rebound. Will markets continue to rally, or could we see another correction should the President make any announcement of changes in policy in the future?

Besides tariffs, the other major situation which market participants have been particularly engaged in is that of the Federal Reserve, and not just the traditional concerns about interest rate policy. Federal Reserve independence has been in the headlines as of late, as well as a potential change in leadership next year. How could all of this affect markets the rest of this year and into 2026?

As always, sometimes the answers to questions similar to those posed above may have uncertain answers. As nobody knows for certain how tariffs or interest rates may direct equity or fixed income markets, it behooves an investor to look at other asset classes which may provide diversification. Today we’ll take a look at the Infrastructure asset class, which can accrue distinctive benefits to a traditional portfolio of stocks and bonds.
We’ll address each of the above topics below.

Trump Tariffs: Will These Drive Inflation and Ultimately Harm Equity Markets?

Some of you who read the last edition of “Piece of the Puzzle” might be astute enough to note that I used the identical section header verbiage to that in the last edition. This is because even though several months have passed, investors still are asking the very same question!

(Image Source: More Businesses Will Pass Along Tariff Costs to Consumers | Twin Cities Business)

To begin let’s look at the progression of tariff events since Trump began his second term of the Presidency. (The events listed during the month of February are identical to the those from the last “Piece of the Puzzle.”)

First Quarter 2025

• February 1: Trump signed three executive orders, one each imposing tariffs on Canada, Mexico, and China. The 10 percent tariffs on all imports from China took effect on February 4, 2025. He subsequently provided a 30-day suspension for the tariffs on Canada and Mexico, which were scheduled to take effect March 4. (China subsequently announced a retaliation on about $21 Billion of U.S. exports at rates of 10% and 15% to take effect on February 10)
• February 10: Trump signed two proclamations expanding the Section 232 tariffs on steel and aluminum (the latter of which raised the tariff rate from 10% to 15%).
• February 14: Trump announced that he plans to impose tariffs on auto imports beginning on April 2. Four days after this announcement, Trump indicated that the rate on autos would be “in the neighborhood of 25 percent.”
• February 26: Trump announced a 25% tariff on imports from European Union (“E.U.”) during his first cabinet meeting of his current Presidency.
• March 4: Trump levies an additional 10% tariff on China and 25% tariffs on Mexico and Canada (with some exceptions).
• March 12: Steel and aluminum tariffs take effect for all countries.

Second Quarter 2025

• April 2: At the President’s “Liberation Day” event, Trump announces a 10% universal tariff on all imports and “reciprocal” tariffs on dozens of countries, with some rates as high as 50%. Global markets plunge in response to his announcement.
• April 9: “Reciprocal” tariffs take effect at 12:01 A.M. Eastern Time. Hours later, Trump announces a 90-day pause on those tariffs, except for China.
• May 12: The U.S. and China agree to roll back tariffs for a 90-day period after officials met in Geneva. The U.S. lowered its minimum tariff on Chinese goods from 145% to 30%.
• May 25: Trump delays E.U. tariffs until July 9, saying he had a “very nice call” with the E.U. President.
• June 4: U.S. tariffs on steel and aluminum doubled to 50% as of 12:01 A.M. Eastern Time. Experts say that higher prices on construction projects, car lots, appliances, and elsewhere were all but inevitable from the higher duties.

Third Quarter 2025

• July 11: Trump threatens 35% tariffs on Canada, with exclusions for certain goods. The President also threatens Brazil with 50% tariffs.
• July 12: Trump threatens 30% tariffs on the European Union and Mexico, with certain exclusions for the latter.
• July 31: Trump announces a trade deal with South Korea, imposing 15% tariffs. Hours later, ahead of the 12:01 A.M. Eastern Time deadline for trading partners to reach a deal, Trump announces a one-week delay and posts new tariff rates. Trump also announces he’s extending the existing 25% tariffs with Mexico, with the same prior exclusions for 90 days.
• August 1: Trump sets tariffs on Russia at 25%.
• August 12: Trump delays additional Chinese tariffs until November.
• September 5: Trump issues an executive order to implement a U.S.-Japan agreement setting tariffs on Japanese products at 15%.

While the percentages of the tariffs listed above appear to be at ominous levels, the question is whether the actual rates among all imported goods are truly as high as the headline numbers above.

In reality, the effective year-to-date tariff rate of 6% is not even close to double digits:

Data as of 9/25/2025. Source: J.P. Morgan Asset Management

While it is true that this rate is the highest in more than 50 years, the real question is how have such increased tariffs affected inflation, which is ultimately what investors should focus on?

Consumer prices have ticked up by about 0.6% after bottoming during the month of April of this year, as measured by the year-over-year change in the U.S. Consumer Price Index, as shown in the chart below:

Source: Trading Economics (United States Inflation Rate)

Hence, as expected, prices have indeed increased since tariffs, but looking at a broader picture, the inflation rate – while still at a level higher than the Federal Reserve’s target 2% – is moderate, especially when compared to the years 2021 through 2023:

Source: Trading Economics (United States Inflation Rate)

Now, putting this altogether, how have the tariff headlines and actual inflation affected the U.S. equity markets? The answer is that, except for a six-week admittedly scary period from late February to early March, most investors appear to have largely ignored such ominous words and markets continue to reach new heights.

As we continue to indicate during times of market volatility, we believe the best thing to do is to remain patient, not panic, and for the most part do nothing. Investors who heeded that advice despite the volatility due to tariff headlines have overall been rewarded handsomely.

From February 19 through April 7, 2025 the broad U.S. Equity market, as measured by the Russell 3000 (“R3K”) Index, fell from closing levels of 3,490 to 2,874, a decline of more than 17%^[1]. However, those investors who kept their calm without selling and maintained discipline would recaptured their capital by June 26, when the R3K closed at 3,491. Three months hence^[2], the R3K has increased by another 8+%. While it’s been a bumpy ride for sure, broadly-diversified U.S. Equity investors have increased their portfolio by more than 12% year-to-date.

Source: Yahoo! Finance

In summary, the tariff headlines are unlikely to go away, but as we have seen, for the most part the direst effects of such potential tariffs have not come to fruition, and equity markets continue to reflect those sentiments.

The Outlook for Federal Reserve Rate Policy

Earlier this year, when the Fed Funds Target Rate range was 425-450bp, the median forecast was for two quarter-point rate cuts (to a range of 375-400bp range):

Source: CME Group. Data from 2/28/2025

Only one quarter-point rate cut has already come to fruition, with the most recent one occurring on September 17, 2025. With prospects of a weakening economy, about ¼ and ¾ of market participants are expecting one and two rate cuts respectively:

Source: CME Group. As of 9/22/2025.

So, what has caused such a shift in market participants’ views? Comparing some of the verbiage from recent Fed statements might provide some clues (text in red and strikethrough indicate verbiage that has been removed and text in blue indicates verbiage that has been added; all other text remains verbatim):

July Statement compared to June Statement:

September Statement compared to July Statement:

Putting this altogether, we can take away the following:

1. Economic Growth: In June, the Fed was still very positive on GDP growth, moderated its enthusiasm in July, and maintained its posture in September.
2. Unemployment: In both June and July, the Fed was still very positive on employment, but in September acknowledged that unemployment “has edged up.”
3. Inflation: In all three months, the Fed acknowledged that inflation remained “elevated,” but in September added the additional caveat that such inflation “has moved up.”

Given the elements above, the Federal Reserve faces a conundrum: While inflation is not “out of control” and is rather only “elevated” (i.e., the Producer Consumption Expenditure (PCE) rate of 3% is 1% higher than the 2% goal), unemployment has definitely increased (although an unemployment rate of 4.3% in August is still low by historical standards). Without a clear positive on either side, perhaps the Fed might look at one other factor: that of the shape of the yield curve.

Normally the yield curve, which is typically created using U.S. Treasury security data, has a positive slope, meaning that yields of short-term Treasury maturities, “T-Bills,” have lower yields than those of medium-term Treasury maturities (“T-Notes”), which in turn have lower yields than those at the very longest maturities (“Long Bond”).

Rather than exhibiting a true monotonic^[3] upward sloping yield curve, the yield curve exhibits a downward slope from the so-called “front end” to around the one-year maturity.

Source: Wall Street Journal (https://www.wsj.com/market-data/bond). As of 9/22/2025.

This downward-sloping yield curve generally means implies one of two situations (or both of them simultaneous):

1. We are in a recession or may be entering one soon.
2. The Federal Funds Rate may be higher than the so-called “neutral rate” viewed appropriate by market participants.

We’ve already addressed the first factor by examining the Federal Reserve’s statements. Given that much of the first-year maturity portion of the curve has persistently been downward sloping, the “neutral rate” theory idea continues to have much clout. This is further ammunition for the necessity of rate cuts.
Lastly, we would be remiss if we didn’t address the elephant in the room, that of President Trump’s continued pressure on Chairman Jerome Powell to lower interest rates and Trump’s frustration that – at least prior to September – the Federal Reserve had failed to do so for many consecutive meetings.

As a policy wonk, Chairman Jerome Powell seems to be above reproach and has said on numerous occasions he would not resign on his own volition. If Powell refuses to accede to Trump’s wishes, the President could theoretically fire Powell, but even if that firing was held up by the Courts, we believe the immediate effect on rate policy would be fairly low^[4]. The damage could be the longer-term implications to Federal Reserve independence, a holy grail since the founding of the institution on December 23, 1913.

Investing in Infrastructure: The Ultimate Diversifying Asset Class

In the quest for constructing optimal portfolios with the highest risk-adjusted returns, seeking those investments that provide strong diversification from other assets held in a portfolio will ultimately be most successful in accomplishing such a quest.

Alternative assets are a toolkit in the portfolio construction arsenal to achieve increasing risk-adjusted return as their investment characteristics are often non-related (or in finance parlance non-correlated) with those of the traditional assets of public stocks and securitized bonds.

One such alternative asset that has gained particular attraction in recent years is neither a recently-created one, nor has it been perceived as particularly attractive: Infrastructure. Below we provide an introduction to this asset class and why we feel it should merit inclusion in a portfolio.

Photo Credit: Third Way

Below we’ll attempt to answer the following questions:

• What is Infrastructure?
• What is the magnitude of expected future Infrastructure needs?
• What are the key benefits of investing in Infrastructure?
• How has Infrastructure performed relative to other asset classes? What is the evidence demonstrating that Infrastructure investing diversifies?
• What ways can an individual invest in Infrastructure?

What is Infrastructure?

Put simply, Infrastructure is an asset class that represents the physical structures that can improve quality of life for humans. Sectors illustrative of the Infrastructure asset class can include the following:

Photo Credit: KKR

What is the magnitude of expected future Infrastructure needs?

Infrastructure is expected to have long-term significant growth, both domestically and abroad, with estimates of more than $7 Trillion over the next ten years in the United States, and nearly $100 Trillion globally for 25 years through 2040:

Sources: American Society of Civil Engineers, Global Infrasturcture Hub by G20, J.P. Morgan Asset Management

What are the key benefits of investing in Infrastructure?

While different Infrastructure investments may have varying investment objectives, overall allocating to the asset class may provide the following benefits:

• Capital Preservation^[5]: Essential services required through market cycles and with strong market positions may create resiliency to economic shocks and market disruptions.
• Consistent Cash Distribution: Infrastructure assets may provide an opportunity for potential consistent income and favorable risk-adjusted returns often supported by long-term contracts or regulated revenues.

Sources: MSCI, J.P. Morgan Asset Management

• Inflation Hedging: Infrastructure can provide a hedge against inflation due to its pricing power, contracted price and inflation adjustments, regulated return frameworks, and pass-through of operating costs.
• Diversification^[6]: Potential low correlation to traditional asset classes and to other diversifying strategies including real estate.
• Upside Potential^[7]: Investment opportunities in thematic trends (e.g., digitization, decarbonization and deconsolidation) may benefit from sustainable, long-term industry tailwinds.

How has Infrastructure performed relative to other asset classes? What is the evidence demonstrating that Infrastructure investing diversifies?

Historically, the returns on Infrastructure have exceeded a diversified traditional investments portfolio consisting of 60% U.S. Large Capitalization Stocks and 40% U.S. Investment Grade Bonds, also known as a “60/40” portfolio. Infrastructure returns have also been superior to most other Real Asset and Private Markets strategies. Only the higher-risk, more growth-oriented Private Equity and Venture Capital asset classes have outperformed^[8]:

Sources: Burgiss, Cliffwater, FactSet, NCREIT, PivotalPath, J.P. Morgan Asset Management

As noted in the answer to the previous question, diversification is one of the potential benefits from investing in Infrastructure. From a qualitative perspective, the return profile of the Infrastructure asset class – particularly in its private form – is different from those of traditional assets, especially public stocks and investment grade bonds. This differing return profile has important implications when applied to portfolio construction because adding assets which have different return characteristics increases diversification.

As shown in the graphic above, Private Infrastructure’s historical performance characteristics have been shown to have a very low (near zero) correlation to a traditional 60/40 portfolio. Moreover, the historical performance of Infrastructure has a lower correlation to a 60/40 portfolio than those of other Private Markets asset classes, including Venture Capital, Private Equity, and Direct Lending.

What ways can an individual invest in Infrastructure?

Historically, most investors accessed Infrastructure either by committing capital to a collection of individual projects via a separately-managed account or through closed-end drawdown funds managed by large asset managers.

While these methods have provided direct access to Private Infrastructure, the disadvantages of these methods are multifold; here are just a few of them:

• Illiquidity of investments
• Unpredictability of capital calls^[9] (in the case of drawdown funds)
• Opaqueness of investments
• High Minimum Investment
• Complicated Tax Reporting

Fortunately, in recent years investing in Infrastructure has become markedly easier with the introduction of a variety of evergreen vehicles, or funds which exist in perpetuity and may be purchased as regularly as once a day and offer the potential for up-to-quarterly liquidity^[10]. Most of these funds have minimum investments^[11] well below those of traditional infrastructure vehicles.

To learn more about Infrastructure and how the asset class can be a part of a diversified portfolio, please contact your First Foundation Advisors representative for further information.

[1] Only price change is considered here. Including dividends would lessen the drawdown somewhat, but the loss would still be quite severe.
[2] As of 9/26/2026.
[3] A “monotonic upward sloping yield curve” means that longer maturities always have higher yields than shorter maturities.
[4] Jerome Powell does not explicitly control Federal Funds Rate policy by himself. Rather, the Federal Open Market Committee (FOMC) which consists of twelve members (seven members of the Board of Governors, plus four rotating Reserve Bank presidents plus the President of the Federal Reserve Bank of New York) vote with each vote carrying equal weight to determine the policy outcome. With that said, the Fed Chairman – and by extension possibly the President – clearly has sway in that outcome.
[5] Capital preservation is no guarantee against future losses.
[6] Diversification does not guarantee returns or capital preservation.
[7] There is no guarantee that trends will continue or that an investor will be able to take advantage of such trends.
[8] Past performance is no guarantee of future results.
[9] In the case of closed-end, drawdown funds.
[10] Liquidity is not guaranteed. Interval Funds have an SEC requirement to liquidate – at a minimum – 5% of the fund’s Net Asset Value each quarter. Tender Offer Funds, on the other hand, do not have such a requirement, although most will offer some liquidity up to a maximum of 5% of a fund’s Net Asset Value.
[11] Most infrastructure Interval Funds typically have no minimum investment. Infrastructure Tender Offer funds typically have minimum investments of $10,000 to $25,000.