
The US-China trade truce doesn't solve the Fed's headache
The agreement between the US and China to roll back their respective tariffs for 90 days has led to renewed optimism that the worst of America's trade wars is over. I'm not seeing the 'breakthrough": There's still plenty of scope for economic damage that the Federal Reserve will struggle to contain.
First, the rollback might not last and doesn't change the broad contours of the story. Tariffs will still be high, fueling inflation and stunting growth. The Yale Budget Lab estimates that the average effective tariff rate will be 17.8%, up from about 2.5% when President Trump started his second term. That's enough to increase the price level and the unemployment rate by about 1.7 and 0.35 percentage points, respectively.
Also Read: Tariff whiplash: The US truce with China offers hollow relief
Second, the 90-day pause merely extends the corrosive uncertainty surrounding the US administration's policies. This will lead businesses to delay purchase, investment and hiring decisions.
Third, the Fed will still face the difficult choice between fighting inflation and supporting economic growth. In the near term, it'll have to be patient, holding interest rates steady and watching inflation expectations—even as this raises the president's ire. As a result, it will probably be slow in responding to weakening in the economy.
The Fed has little choice. When it doesn't know which way the risks skew, it must wait for more information. Right now any major move would have only a 50/50 chance of a positive outcome.
The central bank's predicament is particularly difficult given that inflation has overshot its 2% target since 2021. This makes any attempt to prioritize growth fraught, because it increases the probability that inflation expectations will become unanchored, triggering an upward price spiral that would be hard to contain.
That's an asymmetric risk the Fed can't afford to take. When inflation expectations rose in the 1970s, it took punishingly high interest rates and a deep economic downturn to get them back under control.
Also Read: Will a US-China trade agreement work? Don't count on it
Being patient, though, also entails risks. As the economist Claudia Sahm has noted, weakness in the US labour market can also be self-reinforcing, as layoffs hit spending and engender more layoffs. Historically, the unemployment rate has tended to rise sharply after crossing the threshold of a 0.5 percentage point increase, leading to recession. Last year proved to be an exception, because the rise in unemployment resulted from labor force growth outpacing strong hiring. This time will be different: Hiring will slow, while deportations and a border crackdown have depressed labour force growth.
What, then, will the Fed do? It probably won't get much clarity on inflation, growth and trade policy until September. If at that point it needs to reduce rates, it'll have to move aggressively to arrest the deterioration in the labor market—especially given that the tariff-induced supply shock will undermine the effectiveness of monetary policy.
Also Read: Powell versus Trump: Why Fed independence matters in times of turmoil
If the US enters a recession, I'd expect rate cuts of 200 to 300 basis points.
The Fed shouldn't be faulted here. In contrast to the pandemic, when it was too slow in responding to inflationary pressures (thanks in part to a flawed monetary policy framework), this time around it's grappling with the fallout of trade policies that are beyond its control.
One can only sympathize and hope that clarity about the proper course emerges soon enough that the Fed can keep the economy afloat. ©Bloomberg
The author is a Bloomberg Opinion writer.

Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles


India Today
33 minutes ago
- India Today
He wants to speak to me: Donald Trump on plans to speak to Musk on phone
US President Donald Trump has said he has no immediate plans to speak with tech mogul Elon Musk, amid their escalating feud over the Republican-backed tax and spending bill. However, Trump also hinted he was open to a conversation, telling reporters, "If I were him, I would want to speak to me".Asked whether a phone call with the Tesla and SpaceX chief was on the horizon, Trump responded, "Umm I haven't really thought about it actually. I would imagine he wants to speak to me. Maybe he's already called. You'd have to ask him. Ask him if he's already called. But I'd have no problems with it".advertisementThe latest comments come after a dramatic fallout between Trump and Musk, once considered allies, following Musk's vocal opposition to a Republican tax-cut package championed by the White House. Though Musk hasn't directly addressed Trump in recent days, he has continued to slam the legislation, which included key components of Trump's domestic economic agenda. The rift became public last week when Musk, who had informally advised Trump during his first term, criticised what the president called the "Big, Beautiful Bill". Trump had initially remained silent, but later told reporters aboard Air Force One that he was "very disappointed" in the billionaire a sharp escalation, Musk declared that Trump would have lost the last election without his backing and even floated the idea of impeachment. The tech mogul, who reportedly spent nearly USD 300 million on Trump's 2024 presidential campaign, had previously vowed to reduce his political donations and called for the ouster of lawmakers who "betrayed the American people".advertisementIn response, Trump suggested his administration could sever government ties with Musk's companies, including lucrative contracts involving SpaceX and its satellite internet wing, the height of the standoff, Musk even threatened to withdraw SpaceX's Dragon spacecraft from NASA missions to the International Space Station, a move that would jeopardize the US space program. He later walked back the strained relationship threatens to ripple through Republican circles ahead of the crucial midterm elections next year. With Musk hinting at pulling financial support and other Silicon Valley donors watching closely, the Republicans risk losing a critical source of influence and InMust Watch


Time of India
40 minutes ago
- Time of India
View: Apple's India plans have two new threats: Trump and China's Xi
By Mihir Sharma Apple Inc. and its main manufacturing contractor Hon Hai Precision Industry Co. are still betting on India. When Hon Hai — better known as Foxconn — revealed through an exchange filing last week that it was putting another $1.5 billion into its operations there, it will have calmed a few nerves in New Delhi. Worries about the future of Apple in the country had been set off by President Donald Trump , who said last month that he had told the company's Chief Executive Officer Tim Cook that 'I don't want you building in India.' This seemed to contradict hopes, shared by both Cupertino and New Delhi, that most iPhones for the US market would come from India by the end of 2026. But on the ground, Apple's turn to the South Asian nation seems well-entrenched. Reports have emerged of a new Foxconn campus meant to house 30,000 employees — the largest such effort in India's recent history — and that another contract manufacturer, Tata Electronics , is now assembling the iPhone 16 in its South Indian plant. Yet CEOs and politicians may have begun to realize that the difficulties involved in shifting — or duplicating — an entire manufacturing ecosystem extend beyond placating Trump. This is a complex environment, and there are severe obstacles to moving it out of China. US politics is only one, though perhaps the loudest. Admittedly, Apple has had a lot of success in India already. That's why even Trump's talking about it. In just the last year, the value of its products manufactured there has jumped 60%, to $22 billion. Over $17 billion is exported; thanks to Apple, India's $38 billion of electronics exports now earn more than even its world-famous pharmaceutical sector. No other investment has produced anything near this scale of return. In fact, it may be the only success of Prime Minister Narendra Modi's pivot to industrial policy in the middle of his decade in power. This rare win happened because Apple and its suppliers were committed to moving production into India, and because both federal and state governments rewrote regulations and permissions to help them make the move. Politicians kept up this support, even when there might be a price to pay. After a border clash between China and India in 2020 that killed 20 of its soldiers, Indian officials restricted investment from Beijing. Those restrictions have slowly softened since then, primarily to ensure that Apple's contractors didn't get caught up in red tape. That experience should have served as a reminder to New Delhi that attracting an entire ecosystem needs three sets of players to cooperate: the companies, the destination market for their products, and the source geography. Apple and Foxconn might be on board; Trump and his tariffs might be managed — but what of China? A recent book by the former Financial Times journalist Patrick McGee argues that Apple in China, and Foxconn in particular, grew because American investors and engineers helped. That's no surprise. Any industrial power trains its competitors and successors. That's what Great Britain did for America centuries ago. The financiers, engineers and suppliers that make up an existing manufacturing ecosystem need to be willing and able to cooperate in creating a new one. They are generally well rewarded for it. Apple's contract manufacturers and component suppliers, large and small, in China might be willing to set up shop in India — after all, profits are profits wherever they are earned. Some of their engineers might be happy to move to supervise new shop floors. But, it turns out, Beijing might not permit that to happen. Many crucial, experienced employees have found themselves forbidden to travel to India and Southeast Asia. Apple and New Delhi have both tried to woo Trump, and make him accept the possibility that iPhones destined for the US will be made in India. But it appears that they may need to woo President Xi Jinping as well. Objectively, India's Apple-led mobile phone ecosystem is nowhere near challenging China's manufacturing dominance. China is, after all, the indispensable country not just for Apple, but for multiple companies struggling to shift production to India, Vietnam and elsewhere. But Beijing now appears to view Apple's India project as a risk — dangerous enough that a few barriers should be erected in its path. Trump, Apple, New Delhi, and Beijing appear agreed on Indian manufacturing's potential over the next few years, whatever the rest of us might think.

Business Standard
42 minutes ago
- Business Standard
Hyundai Motor has rare earths stockpile that could last about a year
Hyundai Motor has a rare earths stockpile that can last about a year and it does not expect any near-term impact from global supply chain disruptions caused by China's export curbs, said a person who attended a company investor call. China's decision in April to restrict exports of a wide range of rare earths and related magnets has tripped up the supply chains central to automakers, aerospace manufacturers, semiconductor companies and military contractors around the world. The stockpiling by Hyundai, the world's No.3 automaker along with its affiliate Kia Corp, indicates it is better-placed than many competitors to withstand restrictions that have already impacted production or the supplier network of companies including Ford and BMW. A Hyundai investor relations official said the South Korean automaker had "far more wiggle room" than rivals with regard to rare earths-related supply chain issues affecting the industry, according to the attendee on the investor call, which was not open to the public. The official told investors Hyundai's efforts to diversify supply chains and improve procurement had succeeded and the company expected to be able to produce electric vehicles or hybrid cars without disruptions "for at least about one year," the attendee said. Hyundai also significantly boosted its rare earths inventories during a recent period when China had slightly relaxed its export restrictions, the official said, according to the attendee who spoke on condition of anonymity because the call was private. The South Korean automaker's stockpile of the key minerals had not been reported previously. It was not clear whether the inventory was solely stockpiled by Hyundai and its affiliate Kia or also included stocks held by their suppliers. "We continuously evaluate market conditions to ensure operational stability and maintain a diversified global supply chain," Hyundai said. "As part of our standard business practices, we maintain appropriate inventory levels to support uninterrupted production." China produces around 90 per cent of the world's rare earths, which are essential for the production of vehicles, especially electric vehicle motors. Hyundai Motor Group also holds about a one-year inventory of rare earths-related magnets needed for its mainstay EVs and hybrid vehicles, said a person familiar with the matter, declining to be named due to the sensitivity of the subject. China's dominance of the critical mineral industry is increasingly viewed as a key point of leverage for Beijing in the trade war sparked by US President Donald Trump's tariffs. US-China trade talks were set to extend to a second day in London on Tuesday as top economic officials from the world's two largest economies sought to defuse a bitter dispute that has widened from tariffs to restrictions over rare earths.