The U.S.-China deal to lower the most aggressive import tariffs between the world's two largest economies could lessen the impact of their trade war, though the levies left in place are still steep and will leave a mark on the economy, Federal Reserve officials said on Monday.

Federal Reserve Governor Adriana Kugler said the 90-day pause on import levies at levels that threatened to shut down bilateral trade reduces chances that the U.S. central bank will need to lower interest rates in response to an economic slowdown.

The outcome of the weekend meetings between Chinese and U.S. officials "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 expects those impacts to be more muted. "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.

In separate comments to the New York Times, Chicago Fed President Austan Goolsbee agreed the weekend deal would lower the impact tariffs have on the economy for now.

"It is definitely less impactful stagflationarily than the path they were on," Goolsbee told the paper. Still, that tariff rate is "three to five times higher than what it was before, so it is going to have a stagflationary impulse on the economy. It's going to make growth slower and make prices rise."

Investors decreased their bets on Monday 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 2025. 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.

The Fed's policy-setting Federal Open Market Committee last week kept its benchmark interest rate in the 4.25%-4.50% range where it had been since December. Policymakers said they were 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.

Source: Investing.com