Keypoints:

1. The rollback of U.S.-China tariffs significantly reduces the risk of friction between the world’s two largest economies, easing global

trade tensions.

2. While tensions between the U.S. and China have eased, tariffs remain a potential source of inflation and the threat has not been fully

eliminated.

3. Markets now expect the Federal Reserve to hold interest rates steady for longer than previously anticipated, with no rate cuts likely in

the near term.

Starting May 14, the newly adjusted U.S.-China tariffs officially took effect. In a joint statement issued earlier, both countries announced the

cancellation of 91% of reciprocal tariffs, the suspension of an additional 24%, and the retention of tariff authority on the remaining 10%. The

tariff relief between the world’s two largest economies has significantly reduced the risk of bilateral friction and helped ease global trade

tensions.

Against this backdrop, investor fears of a recession have eased notably, and market confidence has improved. However, this has done little

to clarify the Federal Reserve’s monetary policy path. While the tariff rollback has softened external risks, it has not shaken the Fed’s view

that inflation remains unanchored and that it is too early for policy easing. Nor is it likely to serve as a decisive catalyst for a shift in the

Fed’s stance.

Tariffs Haven’t Gone Away

Although the U.S. and China have reached a partial tariff relief agreement, a 10% tariff rate remains in place. At the same time, both sides

have established a normalized consultation mechanism and are set to engage in intensive negotiations over the next 90 days toward a more

comprehensive trade deal. This indicates that while tensions have eased, tariffs remain a lingering source of potential inflation risk.

The 90-day suspension window could become a staging ground for the next round of negotiations. If talks fail to deliver meaningful

progress, tariff tensions may flare up again. Meanwhile, non-tariff barriers such as technology export controls and investment screening remain in

place and could become new flashpoints. Notably, a report released Monday by The Budget Lab at Yale University shows that even after the

tariff rollback, the U.S. still faces an effective overall tariff rate of 16.4%—the highest level since 1937.

Source: The Budget Lab at Yale

At present, tariffs remain an unresolved driver of inflation. From the Federal Reserve’s perspective—particularly its focus on inflation

indicators such as the Consumer Price Index (CPI)—there are signs of improvement, but not resolution. In April, headline CPI rose 2.3%

year-over-year, and core CPI increased 2.8%, both the lowest since 2021. However, structural inflationary pressures persist. Energy

services prices rose 1.5% month-over-month, with electricity and natural gas outpacing the broader index. Core services also climbed

0.3%, driven by continued increases in healthcare and transportation services.

Source: U.S. Bureau of Labor Statistics

It’s also worth noting that current CPI figures do not fully capture the lagging effects of Trump-era tariffs. Many businesses are still working

through lower-cost inventories stockpiled before the tariff adjustment, and retailers have yet to pass on higher costs to consumers in a

meaningful way. According to data from the U.S. Department of Commerce, the U.S. international trade deficit—including both goods and

services—rose 14% in March to a record $140.5 billion. While imports surged, exports inched up just 0.2% to $278.46 billion.

Source: U.S. Department of Commerce

As inventories are depleted and the 16.4% tariff burden persists, the cost pass-through from imports is expected to intensify over the next

3–6 months. Additionally, supply chain adjustments following tariff revisions typically take two to three quarters to materialize. When

combined with annual corporate budgeting cycles, the bulk of cost transfer may emerge in the second half of 2025. This could fuel a

resurgence in inflation by the end of Q2—potentially pulling inflation further away from the Fed’s 2% target.

Stable Employment Reduces Pressure on the Fed to Ease

Inflation has yet to show clear signs of retreat, and the labor market is likewise offering little support for aggressive monetary easing. April’s

nonfarm payroll report showed the U.S. economy added 177,000 jobs, well above the expected 138,000. The unemployment rate held steady

at 4.2%, while the labor force participation rate edged up to 62.6%. The broader U-6 unemployment rate also declined to 7.8%.

Source: U.S. Bureau of Labor Statistics

While the manufacturing sector saw its PMI stay below the expansion threshold for a second consecutive month—suggesting localized

impacts from tariffs—job gains remained strong in service sectors like healthcare and transportation & warehousing. Private-sector hiring

accounted for the bulk of April’s employment growth, indicating that corporate hiring plans have yet to contract meaningfully despite

ongoing trade uncertainties.

One of the Fed’s key focus areas—wage growth—did ease slightly to a 3.8% year-over-year pace, but remains above pre-pandemic trends.

The stickiness of labor costs could continue to fuel service-sector inflation. Chicago Fed President Austan Goolsbee noted that the

underlying strength of the job market means the Fed need not respond to short-term volatility, emphasizing that maintaining monetary

stability remains a policy priority.

Rate Cut Expectations Continue to Cool

Previously, the market had priced in the possibility that the Federal Reserve might cut rates early to counter recession risks, but these

expectations have since been revised in light of recent data and easing tariff tensions.

Goldman Sachs has pushed back its forecast for the Fed’s next rate cut from July to December. The firm’s strategists cited developments

such as the U.S.-China tariff rollback and a notable easing in financial conditions last month. They raised their 2025 Q4 U.S. GDP growth

forecast by 0.5 percentage points to 1%, while lowering the probability of a recession over the next 12 months to 35%. Similarly, JPMorgan

delayed its initial rate cut expectation from September to December, noting that tariff reductions help reduce the risk of a U.S. recession

this year.

Latest data from interest rate swaps tracking Fed meeting expectations show the total expected rate cuts for the year have dropped from

75 basis points to 55 basis points. The timing of the first cut has been pushed back to September, with only a 57.4% chance of a cut

by December.

As markets scale back expectations for Fed easing within the year, the 2-year U.S. Treasury yield has surpassed 4%, and the 10-year yield

has climbed above 4.5%. These moves reflect growing market recognition of the Fed’s prioritization of inflation control, tolerance for

economic resilience, and intention to delay rate cuts. The Fed is now expected to keep rates steady longer than previously anticipated, with

no cuts likely in the near term.

Source: TradingView

Conclusion

The easing of U.S.-China trade tensions offers the global market a respite and has temporarily pushed recession-driven rate cuts out of the

mainstream narrative. However, given inflation remains elevated though moderating, and growth shows hidden vulnerabilities, the most

likely Fed path is to maintain rates until incoming data compels action. Rate cuts will be driven by real shifts in inflation and employment, not

by market sentiment.

As Fed Chair Jerome Powell emphasized at the May FOMC meeting, policy decisions will be data-dependent rather than influenced by

market expectations or political pressures.