Polo Rocha
4 min read
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The U.S. trade deal with China has eased the fears of a recession, but remaining tariffs could still threaten the Federal Reserve's dual mandate of keeping inflation low and employment high.
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That has caused traders and forecasters to split on how the Fed will change its strategy in the months ahead.
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Some say the lower tariff levels will have less of an impact on the job market but will push up inflation, requiring the Fed to hold rates higher for longer.
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While others say the uncertainty around tariff policy will stop businesses from hiring, requiring the Fed to step in with a rate cut sooner rather than later.
The pause in the U.S.-China trade war has many investors doubting that the Federal Reserve will cut interest rates soon, since fears of an impending recession are easing.
Before the deal was struck, many thought the Federal Reserve's policy-setting committee would cut its influential federal funds rate this summer to stimulate an economy expected to deteriorate under the weight of tariffs. However, with the agreement alleviating some of the highest import duties on one of the country's biggest trading partners, economists and traders have pushed out those forecasts.
There’s still a path for the Fed to lower rates later this year, analysts say, citing the potential for a slowdown as still-high tariff rates weigh on economic activity. But for a Fed that was already in “wait-and-see” mode, the thawing should help avert the type of large-scale layoffs that would bring the Fed to the economy’s rescue, they say.
“We no longer think that the FOMC will see enough deterioration in labor market conditions to cut in the next few months,” Barclays chief U.S. economist Marc Giannoni wrote in a note to clients, forecasting the Fed will wait until December to cut interest rates.
Bill Adams, chief economist at Comerica Bank, doesn’t expect the Fed to cut rates at all this year. Recession risks looked “uncomfortably high” last month, but they’re significantly lower after the U.S.-China trade tensions simmered down, he wrote in a research note.
Bond markets are still eyeing at least one Fed cut this year, even as they start pricing in chances of a longer Fed delay. The CME Group’s FedWatch tool shows only a 7% probability of the Fed staying steady until December, with 26% seeing at least one quarter-point cut by then, 38% seeing two and 29% anticipating three cuts or more.
Forecasters are also split on how the Fed will conduct monetary policy following the trade agreement with China. Much of it will depend on how inflation and the labor market evolve.
