U.S. President Donald Trump announced these inequitable tariffs on Liberation Day. These tariffs go into effect this Wednesday, and they are predicted to have serious repercussions across the global economy. The FCC’s decision has begun to catalyze a market response. Asian and European equities are moving lower amid concerns of a bearish global economic slowdown. The tariffs affect nearly all imports from China. They appear just as tensions between the United States and China boil over again.
As fears of a looming recession continue to grow, money experts are watching with bated breath. The accompanying CME FedWatch tool reflects the shift in expectations. The likelihood of the Federal Reserve slashing interest rates in May has exploded to 53.5%, a stunning jump from only 10.6% one week ago. This change denotes the sense that fear has started to set in on the economic toll of the new tariffs.
Economic Implications of New Tariffs
The tariffs have landed extremely hard at a 00- unanticipated, almost disastrous time. The reports highlight the tenuous economic partnership between the US and China. After almost two years of escalating hostilities, the US and China agreed to a US-China Phase One trade deal in January 2020. This agreement mandated structural reforms and other changes to China’s economic practices, aiming to restore stability and trust between the two countries. Unfortunately, the new round of tariffs signals a major step in the wrong direction.
China’s response has been just as quick, retaliating immediately by announcing tariffs on dozens of US products ranging from automobiles to soybeans. The continuing U.S.-China trade war has increased concerns about a recession in China, causing even more anxiety. President Joe Biden hasn’t made things any better by keeping all those tariffs in place and adding new levies of his own.
As financial markets continue to absorb the news, investors are daydreaming over possible policy pivots. Richmond Fed President Thomas Barkin is scheduled to speak at an economic club in Washington at 16:30 GMT, and his remarks could further influence market sentiment.
Market Reactions and Currency Fluctuations
The US Dollar Index (DXY) certainly reacted in a significant manner to the announcement of the new tariffs. As of Wednesday it is floating just below that test level around 102.30, after testing the important 102.00 level at the start of Asian trading. Previously during the day, it went even further down, but it looks like it may be turning around off a critical support level around 101.90. This dramatic volatility is a hallmark of the uncertainty that has captured the financial markets.
The trade uncertainty has affected historic major currency pairs as well. In particular, EUR/USD manages to trade clearly above the key 1.1000 barrier on Wednesday. Institutional investors are clamoring for safe haven from the dollar’s strength. This increase can be seen as part of a larger national trend driven largely by anxiety about the ongoing trade war.
Most recently, Fed Chairman Jerome Powell has declared that the Central Bank will pursue a “wait-and-see” approach. This decision is a welcome reversal following the trend. His remarks have fueled speculation about future interest rate moves. This all comes as the Federal Reserve attempts to address the realities of today’s new economic normal.
Broader Economic Concerns
The implications of these tariffs are wider than impacts due to currency shifts and stock markets. Analysts caution that the deepening trade conflict could worsen pre-existing economic fault lines. Both China and Canada have already promised to retaliate against US tariffs. This is the first shot in what could just become a massive trade war.
It is a long way from the peaceful coexistence that existed after the signing of the Phase One deal in early 2020 to such increased tensions. A lot has changed since then. As markets continue to adjust to that uncertainty, investors continue to be hesitant to make large bets in a rapidly evolving economic landscape.
The global economic environment seems more precarious now than ever. Fears of a no-deal Brexit slowdown are now heightened, with negative effects anticipated in all sectors from manufacturing to agriculture. Across the country, state and local policymakers are rising to these challenges. Their actions will be instrumental to establishing long-term economic prosperity on both sides of the Pacific.