What does a 90-day delay mean for the U.S. economy and the Federal Reserve?

What does Trump's temporary concession mean for the U.S. economy and the Federal Reserve?

According to Shanghai Securities Journal, on April 9th, during trading hours in the U.S. East Coast time, President Trump posted on social media that he has authorized a 90-day suspension of tariffs on certain countries, significantly reducing tariffs to 10% during this period.

Can this move alleviate market fears of a U.S. recession? Both JPMorgan Chase and Citigroup pointed out that the current general 10% baseline tariff and tariffs on specific countries and industries keep the overall effective tariff rate at a very high level, posing a significant threat to the U.S. economy.

JPMorgan Chase maintains its judgment of a 60% probability of a U.S./global economic recession, believing that the current tariff shock is 7.5 times that of the 2018-2019 trade war, potentially leading to a purchasing power squeeze of $860 billion (about 2.5% of GDP). Citigroup emphasized that the 90-day tariff suspension may lead to a surge in imports in the second quarter, which could instead drag down short-term growth, and that trade uncertainty will continue to suppress business activity.

The two major banks have differing views on the timing of the Federal Reserve's interest rate cuts. In light of the latest tariff developments, JPMorgan Chase has pushed back its forecast for the first rate cut from June to September. Citigroup, on the other hand, believes that signs of economic slowdown will be sufficient to prompt the Federal Reserve to cut rates in May or June, and expects a total of 125 basis points in rate cuts this year, believing that the Federal Reserve will tolerate the inflation in goods caused by tariffs.

The trade war seems to ease, but pressure remains

Although the Trump administration announced a 90-day suspension of the "reciprocal" tariffs announced last week, giving relevant countries time to negotiate, this has not fundamentally changed the reality of high tariffs.

JPMorgan Chase pointed out that the 10% general tariff remains in effect, and the overall average tariff rate in the U.S. is still as high as 25%, slightly above last weekend's level. JPMorgan Chase estimates that, without considering substitution effects, this corresponds to an additional tax burden of $860 billion, about 2.5% of GDP. JPMorgan Chase believes that the current trade war is "merely the end of the beginning," far from over.

Citigroup also believes that the 90-day suspension "is not as useful as it sounds." Citigroup calculated that, considering the 10% baseline tariff, new tariffs on specific countries, and tariffs on specific industries such as automobiles, steel, and aluminum, the average effective tariff rate in the U.S. has increased by about 21 percentage points compared to the beginning of the year.

Concerns about recession coexist with short-term distortions

High tariffs and ongoing policy chaos, combined with stock market losses and confidence shocks, cast a shadow over the U.S. economic outlook.

JPMorgan Chase maintains its probability of a U.S./global economic recession at 60% (with a 40% probability of non-recession, including the possibility of Trump further retracting tariffs). They believe that the scale of the current tariff shock is enormous, 7.5 times that of the 2018-19 trade war shockIn its baseline scenario, JPMorgan Chase predicts that the U.S. economy will experience a "shallow and brief" recession in the second half of 2025.

Citigroup is more focused on the short-term complex dynamics brought about by the 90-day tariff suspension. They expect that U.S. importers will try to complete their purchases as quickly as possible during the suspension period to avoid potential tariffs, which may lead to a surge in imports in the second quarter, thereby dragging down GDP growth for that quarter. Some of the impact may be offset by increased consumer spending in the second quarter, but consumer spending may slow down in the third quarter. Meanwhile, uncertainty in the business sector will remain high, potentially leading to continued pauses in hiring and investment.

Divergence in Rate Cut Expectations

In terms of monetary policy, the two institutions have significant differences in their expectations for the Federal Reserve's actions.

JPMorgan Chase noted that the latest tariff easing is expected to push back the timing of the Fed's first rate cut from the previously predicted June to September. However, they still expect the policy rate to drop to a terminal level of 3% by the second quarter of 2026.

JPMorgan Chase also mentioned that the minutes from the last FOMC meeting (held before the tariff adjustments) indicated that the Fed was then more concerned about the upward pressure on inflation from tariffs and recognized that policy uncertainty requires a cautious approach to monetary policy.

Citigroup, on the other hand, maintains its more moderate expectations, believing that signs of economic growth slowing in the coming months will be clear enough for the Fed to begin cutting rates in May or June, despite core inflation remaining above target.

They expect the Fed to cut rates by a cumulative 125 basis points this year and believe that policymakers will "look through" tariff-related inflation limited to the goods sector, leaning more towards supporting growth and employment.

Global Central Banks May Cut Rates Early to Address Tariff Shock

Changes in U.S. tariff policy and economic outlook are affecting other economies globally through various channels.

JPMorgan Chase's report mentioned that they recently downgraded their growth forecast for the UK, as weakening global demand will drag down its exports, compounded by the effects of fiscal tightening. This provides greater room for easing by the Bank of England, which JPMorgan now expects will cut rates by 100 basis points to 3.5% by the end of the year (previously expected at 3.75%). Additionally, the Swedish central bank is expected to increase easing efforts, and the Norwegian central bank will likely start cutting rates earlier.

JPMorgan Chase also downgraded its growth forecast for the ASEAN region, primarily due to the income effects from the slowdown in U.S./global growth, although the tariff suspension may provide short-term relief.

For the Eurozone, JPMorgan Chase observed that first-quarter wage negotiation data was relatively mild (expected to grow by 3% year-on-year), which may provide some comfort to the European Central Bank as it assesses its ability to respond to tariff-related growth shocks.

In emerging markets, the Reserve Bank of India has cut rates by 25 basis points, and JPMorgan Chase expects an additional 100 basis points of easing in this cycle, with a terminal rate potentially reaching 5%. The Reserve Bank of New Zealand also cut rates by 25 basis points to 3.5% as expected, retaining room for further cuts, with JPMorgan expecting another 25 basis point cut in the May meeting