U.S. President Donald Trump has set an August 1 deadline for imposing tariffs that could significantly impact major trading partners, including Japan. This move comes amidst a complicated landscape of trade negotiations. It has led to panic among some investors and alarm among economists all focused on rolling economic forecasts.
In light of that threatening deadline, JPMorgan Chase last week increased its recession risk forecast from 60% to 40%. That sentiment has changed, mainly because of the potential impact a U.S.-European Union trade deal could have. In addition to prompting a 15% tariff rate, this deal soothed some of Wall Street’s deepest trepidations over an oncoming recession. Even with this more rosy outlook, analysts warn that tariffs are likely to have a dampening effect on growth.
As things stand now, those effective tariff rates are in many cases much higher than they were at the start of the year. As Andrew Hollenhorst, a Citigroup economist, noted, “Effective tariff rates are significantly higher than they were at the start of the year.” The tariffs have since dropped from that initial proposed 25% rate scheduled for April 2. They remain deeply controversial as the approach the 15% threshold. This regulatory relief has prompted an important review of risks under a new light provided by rising trade tensions.
The Federal Reserve has maintained its benchmark short-term interest rate since Trump took office, reflecting caution regarding the impact of tariffs on inflation. The Fed’s upcoming discussions will likely consider how the U.S.-European deal influences inflationary pressures in light of ongoing tariff scenarios. As Bruce Kasman, JPMorgan’s chief economist, stated, “Tariffs are a tax hike on U.S. purchases of foreign goods, but this tax drag is not likely to be large enough to derail the U.S. expansion.”
Those first, panicky concerns over excessively high tariffs have somewhat subsided. Economists are raising red flags that further trade aggression may do even greater harm to our economic stability. One expert cautioned that “further aggression in trade skirmishes could easily tip the scales toward a mild recession.” This viewpoint gives insight into the fine line policymakers must walk to encourage domestic development while responding to novel dynamics in international trade.
The political and market sentiment against tariffs has changed as the markets adjusted to the new tariff rates. Hollenhorst remarked that “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.” This perception test suggests that tariffs are a big deal. Their current levels may not be as deleterious as we had previously assumed.
Plus, Michael Zezas, a strategist at Morgan Stanley, just said there are signs of cautious optimism on the economic outlook. He stated, “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.”
With the August 1 deadline fast approaching, market participants and policy makers alike are watching trade relations with a hopeful and wary eye. The balance between implementing protective tariffs and ensuring economic growth remains a critical focus for the administration and financial institutions alike.