U.S.–China tariff pause offers relief, but questions remain
Trade uncertainty has dominated recent headlines, driving volatility in financial markets and influencing the Federal Reserve’s (Fed) policy outlook at its meeting in May where it left the federal funds rate unchanged for a third consecutive meeting. Trade policy and its effects on inflation, unemployment, and consumer demand continue to cast a shadow over the decisions that businesses, the Fed, and investors will make in the weeks and months to come.
This week’s pause on recently imposed tariffs between the U.S. and China offered promising news to financial markets shaken by trade uncertainty. While questions remain about how the final agreement will be hammered out over the next 90 days, the worst-case trade scenario with the U.S.’s largest trading partner seems to have been taken off the table. Easing of tensions, should they be sustained, would help support U.S. employment, ease downward pressure on corporate earnings, and lower the risk of recession. Markets have rallied more than 20% since the April 7 low putting equities near peak price-to-earnings (P/E) levels, pricing in positive resolutions of trade issues, even as negotiations with China and others continue and as tariff rates are poised to remain above 10%, a sharp increase relative to 2.4% at this time last year.
Businesses have already been taking action to prepare for tariffs. Some businesses accelerated shipments to get ahead of higher tariff rates with container unit volumes for the top eight U.S. ports up 10.1% year-to-date through March compared to 2024. Shipping volumes by air and sea have declined in recent weeks. It remains unclear whether this slowdown is temporary or signals a larger economic impact ahead. The story will unfold as more reports and additional trade deals are completed.
At its May rate-setting meeting, the Federal Open Market Committee (FOMC) maintained its target range for the federal funds rate at 4.25% – 4.50%, where it’s been since December. Consumer demand has stayed steady, inflation measures remain mixed, and unemployment has held firm at a low rate. During its May meeting, the Fed acknowledged increased risks to inflation and the unemployment rate stemming from uncertainty about the economy because of policy changes by the new administration, most notably, trade and tariffs. During the post-meeting press conference, Fed Chair Jerome Powell stressed that the Fed isn’t in a hurry to change monetary policy. Should the labor market weaken or reduced consumer confidence cause consumer demand to falter, the Fed could move to take definitive action on lowering rates.
The U.S. economy’s fundamentals have stayed strong, even as many businesses have been in a holding pattern awaiting a resolution on the tariffs. The China deal gives businesses hope that trade issues can be resolved without the U.S. economy entering a recession. Reduced uncertainty about trade policy, if sustained, should go a long way toward stabilizing financial markets and allowing businesses to focus on growth. That said, the road ahead on tariff negotiations is likely to be met with fits and starts.
