U.S. and Chinese negotiators delivered a 90-day cease-fire on the most punitive import levies, trimming the edge off a dispute that had threatened to cripple bilateral commerce.
Federal Reserve Governor Adriana Kugler welcomed the détente, saying it “obviously … is an improvement as far as trade between the two countries” is concerned.
Tariff Levels Remain ‘Pretty High’
Despite the truce, the tariff rate on Chinese imports is locked at 30% for the next three months—levels Kugler still deems “pretty high.” Speaking at a Central Bank of Ireland symposium in Dublin, she predicted “definitely an increase in prices and a slowdown in the economy” from the duties that remain.
Yet she added, “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,” hinting that the Fed might not have to rush toward rate cuts if the damage proves limited.
Goolsbee Weighs the Stagflationary Risk
Chicago Fed President Austan Goolsbee echoed that cautious optimism in an interview with the New York Times. “It is definitely less impactful stagflationarily than the path they were on,” he said, while warning that tariffs are still “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.”
Market Reaction: Rate-Cut Bets Pushed Back
Prior to the cease-fire, futures traders had pencilled in the first quarter-point reduction in the federal funds rate for July. With tensions easing, those wagers slid toward September, and investors now see only a half-percentage-point of total cuts by year-end 2025. The Fed’s policy-setting committee left its benchmark range at 4.25%–4.50% last week, stressing that it will wait for clearer evidence on whether inflation or growth takes the bigger hit from trade frictions.
Three Paths the Fed Must Monitor
Officials outline three possible scenarios. A resurgence of tariff aggression could rekindle recession fears and force accommodative policy sooner than markets expect. A successful compromise might allow the economy to meander without further stimulus. The current middle path—partial relief with levies still biting—fits Goolsbee’s analysis that the impulse is milder but not neutral.
Reputational Stakes and Inflation Outlook
Consultants at the firm helmed by former Fed Governor Larry Meyers argue that, “Even with this reprieve, tariffs are much higher than they were, so the outlook still involves tariff raising near-term inflation well above 2%,” giving the central bank a rationale to stay patient. The Fed also worries about the reputational damage of mis-timed policy moves: easing too quickly could fuel price pressures just as the public’s inflation expectations begin to stabilise.
What to Watch Next
Negotiators have 90 days to turn the preliminary deal into something more lasting. If they succeed, the Fed could maintain its hold-steady stance deep into the second half of the year. Failure, however, would revive talk of a tariff-induced slowdown and thrust rate cuts back onto the table more quickly than policymakers now anticipate. The central bank’s next projections, due after the June meeting, will reveal how firmly officials believe the worst of the trade war is truly behind them.