US Federal Reserve to stay patient amid cooling trade war and inflation

TAMER-THAN-EXPECTED inflation and a significant de-escalation of a US-China trade war are easing fears of a sharp squeeze on American households and businesses in coming months, prompting Wall Street firms to pare predictions of a recession and giving the US Federal Reserve room to leave interest rates where they are.

JPMorgan Chase and Barclays were among firms adjusting their forecasts on Tuesday (May 13) to reflect a more benign economic trajectory after the US and China reached a deal over the weekend to reduce the most punitive of the tariffs they had put on each other since early April.

JPMorgan economists now see the chance of a recession as less than 50 per cent; Barclays economists no longer have recession in their forecast at all. Both had earlier expected high tariffs to hit consumers and firms hard, putting the brakes on spending and economic activity.

Financial markets also repriced after the US-China agreement, slashing bets that the Fed would need to start cutting rates by July to cushion an economic downturn. Traders now see just two interest-rate cuts by year’s end, beginning in September.

A US Labor Department report on Tuesday showing consumer prices rose 2.3 per cent in April, the smallest year-over-year gain in more than four years, solidified those market bets and the expectation that Fed policymakers will deliver gradual rate cuts later in the year instead of taking earlier, more aggressive action.

“There’s been a fear that tariffs are going to push inflation higher, and they may still, but today’s data at least gives investors a sense of relief that inflation is still moving in the right direction,” said Jake Dollarhide, the CEO of Longbow Asset Management.

Still, “uncertainty about tariff policies and implications for inflation going forward will keep (Fed policymakers) on the sidelines for now”, wrote a group of economists at Raymond James.

The Fed last week held short-term borrowing costs in the 4.25 to 4.50 per cent range, where they have been since December.

Fed chairman Jerome Powell said at the time that he saw so far no signal in the data of a crumbling economy. With inflation still above the Fed‘s 2 per cent target and rapidly evolving trade policy likely to boost it further even as it slows the economy, the right move is to wait for more clarity before adjusting rates, he said.

Trump weighs in

US President Donald Trump took the opportunity to repeat his standing call for the Fed to lower rates, saying Tuesday’s consumer price index data showed prices of “practically everything” are down.

“What is wrong with Too Late Powell? Not fair to America, which is ready to blossom? Just let it all happen, it will be a beautiful thing!” Trump wrote in a post on Truth Social.

Prices for some items such as food and particularly energy goods, which have fallen this year on concerns about global growth as well as higher crude oil production, were lower in April than in March. But annualised inflation, while well down from its peak, remains above levels consistent with the Fed‘s 2 per cent target.

Fed policymakers say that reducing rates when inflation is too high and expected to accelerate at least temporarily is a recipe for unleashing even more inflation that could prove wilting for economic growth.

Underlying consumer prices excluding volatile food and energy rose at a heated 2.8 per cent year-over-year pace, Tuesday’s data showed. Prices for some goods seen as vulnerable to tariff-driven price hikes, like apparel, cars and trucks, were flat or fell, bucking expectations even as more of Trump’s new tariffs announced in March and April took effect.

But economists continue to expect in coming months to see goods prices rise due to tariffs, which were as high as 145 per cent on Chinese imports until the detente over the weekend took the rate down to 30 per cent for many of those goods.

Even with that reprieve, tariffs are far higher and cover a broader range of imports overall than any time in the last 80 or so years.

The Trump administration has sealed only one trade deal since announcing its barrage of tariffs on April 2.

“With little clarity on the final status quo for trade policy and Fed policymakers unlikely to preempt any growth or inflation developments, we now only anticipate two Fed rate cuts (instead of three), and believe the first rate cut will come in September (instead of July),” said EY chief economist Gregory Daco. REUTERS