Trade War Warning Downgraded! US Tariffs Have a Smaller Impact Than Expected, Wall Street Lets Out a Sigh of Relief
IntelliFinancess APP has learned that the tariffs imposed by the United States on imported goods seem to be only slightly lower than the level threatened by President Donald Trump in April, but this is enough to alleviate concerns about economic contraction on Wall Street.
As the US and EU have reached a trade agreement, it appears that the actual tariff rate will ultimately fall within the range of 15% to 20%. This rate is much higher than the low single-digit levels seen at the beginning of the year, but lower than the 25% or higher rates feared after Trump's announcement on April 2.
Economists had previously worried that Trump's aggressive tariffs would push up inflation and lead to a significant slowdown in economic growth, even recession. However, since then, pessimistic expectations around tariffs have eased.
For example, Morgan Stanley has reduced the risk of recession from 60% on "Liberation Day" (April 2) to 40%, although it is still higher than normal levels, but at least not as gloomy as before.
Morgan Stanley Chief Economist Bruce Kasman said: "Tariffs are a tax on US consumers' behavior of buying foreign goods. However, this tax burden is unlikely to be so great that it would hinder US economic expansion."
Like other institutions, Morgan Stanley had previously predicted that Trump's tariffs would trigger a wave of retaliatory actions around the globe. Kasman said: "Originally, we expected the trade restrictions to intensify, but now it has evolved into a small step towards opening up markets to the US."
Tariffs Are Still Risky
After the US and EU reached a 15% tariff agreement, Wall Street once again holds this view: the risk of economic contraction has decreased, although tariffs may still have a significant suppressive effect on economic growth.
Morgan Stanley Strategist Michael Zezas said: "We still believe that the most likely outcome is slow economic growth and persistent inflation. This is not recession, but the adverse impact on economic growth from trade restrictions exceeds any potential boost from relaxed regulation and fiscal stimulus."
It can be certain that the final results of this trade negotiation are far from clear.
Before Trump's deadline on August 1, there are still many issues to resolve. If these issues are not resolved by then, US major trading partners such as Japan will face high tariffs.
Zezas added that further escalation of trade tensions "easily leads to a soft recession." Overall, we expect the US economy to slow down, but as fiscal conditions and deficits become clearer, the risk of severe contraction is decreasing."
Fed May Cut Interest Rate in September
The agreement between the US and EU will provide more consideration for the Fed's discussion on tariffs' impact on inflation. Since Trump took office, the Fed has maintained its benchmark interest rate unchanged to a large extent due to policymakers' cautious attitude towards tariffs' inflationary impact.
Markets expect the Fed to stand pat at this week's policy meeting. However, markets will focus on the Fed's next steps and the actual tariff rate will influence their actions.
Markets predict that the Fed may cut interest rates in September. If the economy weakens and inflation is controlled, the likelihood of a September rate cut seems to rise further.
Bank of America Economist Andrew Hollenhorst said: "The actual tariff rate is far higher than the year's initial level. However, as major trading partners' tariffs stabilize at around 15%, rather than the much higher rates announced on April 2, markets and Fed officials will increasingly gain confidence that tariffs will have a limited impact on economic growth and inflation risks."