Recent developments in U.S. trade policies have led to a shift in sentiment on Wall Street, easing initial recession fears linked to President Donald Trump’s threatened tariffs. So, for instance, effective tariff rates have increased by as much as 20% since the start of this year. They’re now landing at about 15%, still a huge improvement over the dreaded 25% or worse suggested back in April.
In early April, with the announcement of high-impact tariffs by President Trump, there was fear that a serious recession was looming. For now, the effective rates are settling into the vicinity of 15%, easing the jitters of investors and economists of all stripes. As recently as a month ago, JPMorgan Chase cut its expected recession likelihood from 60% to 40%. This change is a sign of pent-up realistic market positivity.
The recent U.S.-EU agreement to rein in the IOS has gone a long way to make this happen. It features a hard commitment to maintain 15% tariffs. The agreement has quelled a bit of the darkest Wall Street’s fears about any impending recession. It provides the Federal Reserve greater detail to evaluate the impact of tariffs on inflation.
As exciting as these promising developments are, experts warn that big questions need to be answered before Trump’s August 1 deadline. The Federal Reserve’s decision to hold its benchmark short-term interest rate steady. They should be concerned about how tariffs will drive up costs and undermine American economic competitiveness.
As Andrew Hollenhorst, an economist at CitiGroup, put it, “What’s different now is the range of truly effective tariff rates in place.”
“Effective tariff rates are significantly higher than they were at the start of the year.” – Andrew Hollenhorst, Citigroup economist.
To those accustomed to years of slow growth, Bruce Kasman, chief economist at JPMorgan, is equally optimistic. He rightly points out that tariffs raise the price of American consumers’ purchases of foreign products.
“But with major trading partner tariffs stabilizing closer to 15% than the much higher rates proposed on April 2, markets and Fed officials will be increasingly confident that the drag on growth and upside risk to inflation will be modest.” – Andrew Hollenhorst, Citigroup economist.
Kasman noted that what started as an expectation of increasing global trade restrictions has morphed. Rather than a dramatic action to tamp down trade tensions and unilaterally open markets for the U.S.
“this tax drag is not likely to be large enough to derail the U.S. expansion.” – Bruce Kasman, JPMorgan chief economist.
Morgan Stanley strategist Michael Zezas provided some of the best insights into what these trade policies mean for the broader economy. He suggested that although slow growth and stubborn inflation are expected, these do not automatically lead to a recession.
“But an expected rise in global trade restrictions has turned into a modest step toward opening markets for the U.S.” – Bruce Kasman, JPMorgan chief economist.
Wall Street is still adjusting to the new normal of trade policy and now suddenly relevant economic indicators. Analysts are understandably guarded but optimistic concerning long-term growth trajectories. Their next meeting is the Federal Reserve’s, which ends on Wednesday. Interest rate decisions Experts see it staying the course, holding interest rates steady.
“We still believe the most likely outcome is slow growth and firm inflation: Not a recession, but a backdrop where the adverse effects of trade and immigration controls on growth outweigh the boost from deregulation and fiscal largesse.” – Michael Zezas, Morgan Stanley strategist.
As Wall Street navigates these changes in trade policy and economic indicators, analysts remain cautious yet hopeful about future growth trajectories. The upcoming Federal Reserve meeting, which concludes Wednesday, is expected to maintain its current course without any significant changes to interest rates.