By Padraic Halpin, Howard Schneider
DUBLIN (Reuters) -The U.S.-China deal to lower their most aggressive import tariffs could lessen the impact of the trade war between the world’s two largest economies and lower the likelihood that the U.S. central bank would need to respond with interest rate cuts, Federal Reserve Governor Adriana Kugler said on Monday.
The 90-day pause on import levies at a level that threatened to shut down trade between the world’s largest economies “obviously … is an improvement as far as trade between the two countries” is concerned, Kugler said at a Central Bank of Ireland symposium in Dublin.
She said the tariff rates, now 30% on Chinese imports for the next 90 days, were still “pretty high” and she expected “definitely an increase in prices and a slowdown in the economy” as a result.
But Kugler now expects those impacts to be more muted, and that “my basic outlook, in some sense, may have changed in terms of the extent to which we need to use our tools, and the magnitude,” she said.
Investors on Monday also decreased their bets that the Fed would cut rates early this summer, with an initial quarter-percentage-point rate cut now not expected until September and only a half-percentage-point reduction in total anticipated by the end of this year. Prior to the tariff pause agreed over the weekend, Fed rate cuts were expected to begin in July.
But as the Trump administration has seemed to back off its most aggressive tariff strategies, U.S. stocks and market interest rates have risen, and the threat of a tariff-driven recession has diminished.
REPUTATIONAL HIT
The central bank’s policy-setting Federal Open Market Committee last week held its benchmark interest rate steady in the 4.25%-4.50% range where it had been since December, with policymakers saying they’d be unlikely to make a change until it was clear whether tariffs would lead to a new inflation problem, or undercut growth and pose risks to the job market that warranted a reduction in borrowing costs.
A third possibility – of a negotiated resolution that leads to a more limited jump in inflation and keeps growth largely on track – was highlighted by the trade war detente announced over the weekend.
“Even with this reprieve, tariffs are much higher than they were, so the outlook still involves tariff raising near-term inflation well above 2%,” offering a reason for the Fed to stay on hold, economists with the consulting firm of former Fed Governor Larry Meyers said. “What this reprieve does is reduce the likelihood that we’ll see a deterioration in the labor market severe enough for the FOMC to ease despite concerns about elevated inflation.”
Kugler said the trade conflict still could have deep implications for the U.S., including a reputational hit that could drive investors elsewhere.
“In the medium term, if this was long-lasting, I think the one issue that I would be looking to is how supply chains get rearranged … if in the rest of the world, some start feeling that they don’t find a reliable partner at the other end,” she said.
It is also posing immediate problems for the Fed in even knowing the pace at which the economy is growing, or not, because recent data have been so distorted by firms and households rushing to beat import tariffs.
Output contracted in the first quarter, but that was largely attributed to a record surge in imports.
“It is currently hard to judge the underlying pace of growth of the U.S. economy,” Kugler said.
(Reporting by Howard Schneider; Editing by Paul Simao)
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