The Big Picture: Trade Deal Eases Recession Fears
The recent truce in the U.S.-China trade war has lowered the chances of an economic slowdown, which in turn affects what the Federal Reserve (the Fed) might do next with interest rates.
Before the deal, many expected the Fed to cut interest rates soon to help the economy deal with the pressure from high tariffs. Now, with trade tensions easing and fewer tariffs in place, there’s less urgency for the Fed to act quickly.
However, the Fed isn’t ruling out a rate cut entirely. Experts say it could still happen later in the year—especially if the economy slows down or inflation continues to fall.
Why the Fed Was Considering a Rate Cut
The Fed controls interest rates to help manage the economy. If the economy slows down, the Fed might reduce interest rates to stimulate borrowing and spending.
Earlier this year, increasing tariffs between the U.S. and China sparked concerns about a potential recession. Many thought the Fed would cut rates by summer to help avoid a slowdown. But now that the two countries have reached a deal and removed some tariffs, the pressure has eased.
As a result, investors and economists have pushed back their predictions for when the Fed might cut rates.
Will the Fed Cut Rates in 2025?
Some economists say a rate cut is still possible, but not until later in the year.
Marc Giannoni, chief U.S. economist at Barclays, believes the Fed may hold off on any cuts until December. He doesn’t think the job market will weaken enough in the next few months to force a rate cut sooner.
Bill Adams, chief economist at Comerica Bank, believes the Fed won’t cut interest rates at any point this year. He says recession risks were high just a month ago, but they’ve now dropped significantly after the trade truce.
However, bond markets aren’t so sure. Data from CME Group’s FedWatch tool shows mixed expectations:
- 7% chance the Fed will keep rates steady through December
- 26% chance of at least one rate cut
- 38% see two cuts
- 29% expect three or more
Clearly, investors are still divided on what will happen next.
What Will Influence the Fed's Decision?
The Fed’s next move will depend on how inflation and the job market change in the coming months.
Even though inflation has been coming down, it's still higher than the Fed's 2% target. In April, the Consumer Price Index (CPI) rose 2.3% compared to last year—the lowest since early 2021, but still above target.
Giannoni says the Fed will wait until monthly inflation reports show consistent declines before considering a cut.
Meanwhile, the unemployment rate is expected to stay around 4.3% this year, giving the Fed little reason to act fast.
Tariffs Are Still in Play
Despite the trade truce, the U.S. is still keeping some tariffs in place. Some tariffs were cut, but others remain, including a 30% tariff on certain Chinese goods. The government has also said it won’t go lower than 10% in future trade deals.
These remaining tariffs could raise prices in the coming months. Ronald Temple, chief market strategist at Lazard, said this could be a reason for the Fed to hold off on rate cuts this year.
Could the Fed Cut Rates Sooner?
While most experts agree that a summer rate cut is unlikely, some still believe the Fed might act sooner than December.
Samuel Tombs from Pantheon Macroeconomics notes that the average U.S. tariff on imports is now 16%, up from 3% last year. This ongoing trade uncertainty could hurt business investment and hiring.
ING economist James Knightley says the easing of trade tensions could help reduce inflation worries. He thinks the Fed could cut rates as early as September.
The U.S.-China trade truce has taken pressure off the Fed to cut interest rates immediately. But the decision will ultimately depend on how inflation and job numbers trend in the coming months.
