The Fed waits for the fog of Trump's trade war to lift

The Age

06-05-2025

The US Federal Reserve Board's rate-setting committee is holding a two-day meeting this week. It will again leave interest rates unchanged in the world's largest economy. And Donald Trump will, again, lash out at the Fed's chairman, Jerome Powell.
The outcome of the meeting is predictable because the outlook for the US economy is so unpredictable, thanks to the chaos and uncertainty that Trump's ever-evolving trade war on the rest of the world has unleashed.
The Fed has adopted a 'wait and see' stance, waiting to see both the final form of Trump's tariffs and the impact they have on inflation, jobs and economic growth, and the final shape of the 'big, beautiful' budget bill with more than $US4 trillion ($6.2 trillion) of tax cuts and some cuts to spending that Congressional Republicans are still trying to pull together.
With the 'Big One' – Trump's 'reciprocal' tariffs – paused for 90 days until July, the clouds of uncertainty over the economy won't lift until then, if they do at all, which makes it unlikely that the Fed will cut its policy rate, the federal funds rate, before then.
That will disappoint some within financial markets.
When Trump announced the pause in the reciprocal tariffs, and more recently when there were signs that the US and China might back away from their tit-for-tat extreme tariff rates (America's 145 per cent rate on imports from China and China's 125 per cent retaliatory tariffs), the sharemarket rebounded, bond yields, which had been surging, fell back and investors priced in as many as four rates cuts this year. The markets are acutely sensitive to any developments in the trade war.
The outcome of the meeting is predictable because the outlook for the US economy is so unpredictable.
Now, with Powell making it clear that the Fed wants greater clarity before it moves, expectations have become more sober. Markets are pricing in three cuts, but an increasing number of economists anticipate only two, with the Fed seen as unlikely to move before September.
That makes sense. While the reciprocal tariffs have been paused, the 10 per cent baseline tariff on all imports remains and appears permanent, as do the 25 per cent tariffs on aluminium and steel imports, some tariffs on automobiles and auto parts, the removal of the exemption from duties for small parcels and massive increases in port charges for Chinese-owned, operated or built ships.